Insolvency and Restructuring Manual 9781526521446, 9781526521477, 9781526521460

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Insolvency and Restructuring Manual Fourth Edition

Insolvency and Restructuring Manual Fourth Edition Simon Beale Senior Counsel and Head of Insolvency, Macfarlanes LLP

Paul Keddie Partner, Macfarlanes LLP

Tim Bromley-White Associate, Macfarlanes LLP

BLOOMSBURY PROFESSIONAL Bloomsbury Publishing Plc 50 Bedford Square, London, WC1B 3DP, UK 1385 Broadway, New York, 10018, USA 29 Earlsfort Terrace, Dublin 2, Ireland BLOOMSBURY and the Diana logo are trademarks of Bloomsbury Publishing Plc First published in Great Britain 2023 Copyright © Bloomsbury Professional, 2023 All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or any information storage or retrieval system, without prior permission in writing from the publishers. While every care has been taken to ensure the accuracy of this work, no responsibility for loss or damage occasioned to any person acting or refraining from action as a result of any statement in it can be accepted by the authors, editors or publishers. All UK Government legislation and other public sector information used in the work is Crown Copyright ©. All House of Lords and House of Commons information used in the work is Parliamentary Copyright ©. This information is reused under the terms of the Open Government Licence v3.0 (http://www. nationalarchives.gov.uk/doc/open-government-licence/version/3) except where otherwise stated. All Eur-lex material used in the work is © European Union, http://eur-lex.europa.eu/, 1998-2023. Simon Beale, Paul Keddie and Tim Bromley-White have written this manual in their respective capacities as Senior Counsel, Partner and Associate at Macfarlanes LLP. Simon, Paul and Tim would like to acknowledge, and give thanks to, the Banking & Finance department at Macfarlanes for their support and input into the production of this manual. British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library. ISBN:

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Preface It is more than 13 years since the first edition of this book appeared, and nearly five since the third edition. Tim Bromley-White has now joined me and Paul Keddie as an additional co-author and has played a valuable role in helping complete this fourth edition. There have again been some significant changes to our insolvency legislation during the last five years. When the third edition was published, the Government had already been consulting, among other things, on restrictions on the abilities of suppliers of goods and services to amend or terminate contracts, on a standalone pre-insolvency moratorium and on a new form of restructuring plan. However, the Covid-19 pandemic provided the necessary impetus for all of these things to be passed into law. Our firm was indeed lucky enough to act on the first case in which a debtor’s use of the new moratorium was contested in court. We have seen the introduction for the first time of regulations which constrain an administrator’s ability to dispose of assets to connected parties during the first few weeks of an administration. Meanwhile, the courts have continued to play their role, giving rise, for example, to a key Supreme Court decision clarifying a director’s duties to creditors. At the time of writing, our economy looks set to suffer further shocks as a result of a double-digit rate of inflation and a rise in interest rates to a higher level than we have seen for many years. We look set to discover whether the range of formal processes now available in England and Wales will give practitioners all of the tools they need to allow the rehabilitation of companies in an early stage of difficulty or whether these processes need further fine-tuning. Whatever the case, we hope that the present edition of this book will assist. While it is a guide to the law and practice of insolvency and restructuring, it is intended to be neither an academic work nor an exhaustive guide to the relevant legislation. There are many excellent textbooks already in existence which focus in great detail on the various areas covered in this book. Instead, as with previous editions, our aim has been to produce the manual which I wished I had had when I first started practising in this field a quarter of a century ago. We hope it will serve as a useful introduction to anyone else encountering these areas for the first time. It looks to bridge the gap between a student course book and the reference works used by experienced practitioners. We have dealt with insolvency principles and processes first, since it is necessary to know the effects of a formal insolvency in order then to consider restructuring as an alternative. Directors of an insolvent company will have concerns of their own, so we have devoted a chapter to these. Some creditors will have advantageous positions – they include not only secured creditors, but also landlords, employees, pensionsrelated creditors and retention of title creditors – and we have examined each of their special rights and remedies. We have then sought to highlight a variety of the additional considerations involved in a restructuring. Finally, given the increasingly global nature of many groups’ businesses, we have looked at various of the crossborder considerations which may presently apply, including some recent changes as a result of Brexit. In updating this book, Paul, Tim and I have been fortunate once again to have had the assistance of so many colleagues within Macfarlanes LLP. Jat Bains, Rebecca v

Preface Delaney, Sophie Donnithorne-Tait, Alex Ereira, Mark Lawrence, Jamie Macpherson, Tom Pedder, Matthew Ramsey, Ben Webster and Stacey Yon, among others, were kind enough to share specialist knowledge from their own practice areas with us. Saajidah Ahmed, Emilia Colston-Weeks, Capucine Deroulede, Aisha Dunsford-Castro, Rhian Edwards, Charlie Goodman, Harris Grigoriou, Thomas Jacob, Katya Lambert, Rosie Marriott, Ashley Mount, Annabel Record, Katie Rourke, Jenny Shelley, Khadijah Sufi, Olivia Underwood, Will Underwood, Amy Walker and Maddie Walls also deserve thanks for checking legislation and case references. Finally, Paul, Tim and I  express our love and gratitude to our respective partners Clare, Vicky and Clare (again) for forgoing our company for quite a few evenings and for the occasional weekend in order to allow this fourth edition to see the light of day. The law in this fourth edition is that applicable to England and Wales at the end of October 2022. Simon Beale January 2023

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Contents Prefacev Table of statutes xi Table of statutory instruments xvii Table of cases xxi Chapter 1 What are insolvency and restructuring? 1.1 Introduction 1.2 Where is corporate insolvency law found? 1.3 Inability to pay debts 1.4 What are the possible formal processes? 1.5 What is the insolvent entity? 1.6 Restructuring as an alternative

1 1 2 4 9 17 20

Chapter 2 Who gets what? 2.1 Introduction 2.2 What will be available to the creditors? 2.3 Secured creditors 2.4 Expenses associated with the formal insolvency process 2.5 Preferential debts 2.6 The prescribed part 2.7 Ordinary unsecured creditors 2.8 Interest 2.9 Non-provable debts 2.10 Debts due to members in their capacity as members 2.11 Set-off

23 23 25 26 32 38 40 41 48 48 49 50

Chapter 3 Liquidation 3.1 Introduction 3.2 What are the uses of each type of liquidation? 3.3 Commencing a voluntary liquidation 3.4 Commencing a compulsory liquidation 3.5 What are the other consequences of liquidation? 3.6 Disclaimer 3.7 Duties of the liquidator 3.8 Powers of the liquidator 3.9 How are creditors involved and informed? 3.10 How do unsecured creditors recover monies due to them? 3.11 The distribution process 3.12 Dealing with creditors in an MVL 3.13 Ending the liquidation

55 55 55 57 65 72 74 76 78 81 85 88 89 90

Chapter 4 Administration 4.1 Introduction 4.2 What is the purpose of administration? 4.3 Commencing an administration 4.4 What is the effect of the administration moratorium? 4.5 What are the other consequences of administration? vii

93 93 94 95 108 111

Contents 4.6 4.7 4.8 4.9 4.10 4.11 4.12

How are the creditors informed and involved? Duties of the administrator Powers of the administrator Protection of supply contracts Supervision of the administrator Ending the administration Pre-packaged administrations

113 121 123 127 131 134 137

Chapter 5 Antecedent transactions 5.1 Introduction 5.2 Transactions at an undervalue 5.3 Preferences 5.4 Transactions defrauding creditors 5.5 Extortionate credit transactions 5.6 Floating charges for no new value 5.7 Distributions post-presentation of winding-up petition 5.8 Who is a ‘connected’ person?

147 147 149 154 157 159 160 162 166

Chapter 6 Position of directors 6.1 Introduction 6.2 Who is a ‘director’? 6.3 Directors’ duties 6.4 Risks to directors 6.5 Practical consequences for directors 6.6 Additional issues for public companies 6.7 The directors’ role in a formal insolvency process

168 168 168 171 173 186 191 192

Chapter 7 Standalone moratorium 7.1 Introduction 7.2 Which companies are eligible for a moratorium? 7.3 How can a company obtain a moratorium? 7.4 What is the effect of a moratorium? 7.5 The monitor 7.6 What is the duration of a moratorium? 7.7 Challenges in connection with a moratorium

196 196 196 197 200 204 208 210

Chapter 8 CVAs, Schemes of Arrangement and Restructuring Plans 8.1 Introduction 8.2 Company voluntary arrangements (CVAs) 8.3 Schemes of Arrangement and Restructuring Plans

212 212 214 231

Chapter 9 Secured creditors 9.1 Introduction 9.2 How might a secured creditor enforce its security? 9.3 Appointing a receiver or administrator 9.4 What is the status of a receiver? 9.5 What are the other consequences of receivership? 9.6 How are the creditors informed and involved? 9.7 Duties of the receiver 9.8 Powers of a receiver 9.9 Ending the receivership 9.10 Financial Collateral Arrangements (No 2) Regulations 2003

253 253 253 255 261 262 263 265 267 268 269

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Contents Chapter 10 Other special types of creditor 10.1 Introduction 10.2 Landlords 10.3 Employees 10.4 Pension schemes 10.5 Retention of title creditors

272 272 272 282 292 295

Chapter 11 Restructuring 11.1 Introduction 11.2 Identifying the problem 11.3 Who are the key stakeholders? 11.4 Creating a stable financial environment 11.5 Information gathering 11.6 Looking at the restructuring options and implementing a solution 11.7 Particular types of restructuring 11.8 Pensions issues

299 299 299 302 307 314 315 320 325

Chapter 12 Cross-border issues 12.1 Introduction 12.2 The Retained EU Insolvency Regulation 12.3 The Cross-Border Insolvency Regulations 2006 12.4 Section 426 of the Insolvency Act 1986 12.5 English common law 12.6 Application of English formal processes to foreign companies

335 335 335 342 346 348 350

Index355

ix

Table of Statutes [All references are to paragraph number]

Companies Act 2006 – contd s 901C(2)....................................... 8.3.1.3 (4)....................................... 8.3.4.3 901D........................................... 8.3.5.3 (1), (4)................................ 8.3.5.2 901E(1)....................................... 8.3.5.3 901F................................. 4.9.4.2; 8.3.7.6 (1)....................................... 8.3.6.2 (6)....................................... 8.3.8.1 901G........................................... 8.3.7.6 (3)–(5)................................ 8.3.7.7 901H........................................... 8.3.1.6 901I............................................. 10.4.2.3 993...................................... 1.2.2; 6.4.3.1 1029............................................ 3.13.2 1046............................................ 8.3.8.1 1157.................................... 3.13.3; 6.2.3, 6.4.2.3, 6.4.4 Company Directors Disqualification Act 1986.................... 1.2.4, 1.5.2, 1.5.3; 6.2.3 s 1(1)............................................. 6.4.7.2 1A............................................... 6.4.7.6 6.................................................. 6.4.7.1 7.................................................. 6.4.7.1 (2)............................................. 6.4.7.1 (2A).......................................... 6.4.7.6 7A............................................... 6.4.7.4 8ZA............................................. 6.4.7.1 12C............................................. 6.4.7.5 15................................................ 6.4.7.1 15A............................................. 6.4.7.3 (2)........................................ 6.4.7.6 15B, 15C..................................... 6.4.7.3 Sch 1.............................................. 6.4.7.5 Corporate Insolvency and Governance Act 2020........................... 1.2.1; 4.9.4.5, 4.9.4.6; 7.1; 8.3.1.1, 8.3.7.6 s 12................................................ 6.4.2.4 15................................................ 4.9.4.7

Banking Act 2009............................. 1.2.4 Building Societies Act 1986.............. 1.2.4 Channel Tunnel Rail Link Act 1996. 9.3.2.2 Commercial Rent (Coronavirus) Act 2022................................ 3.4.3.3; 10.2.1 Companies Act 1989 Pt VII (ss 154–191).................. 7.4.3, 7.4.4 Companies Act 2006.......... 1.2.2, 1.5.1; 2.10; 5.2.4; 8.3.5.1, 8.3.5.3, 8.3.6.3; 12.6.1, 12.6.2, 12.6.5.1, 12.6.6, 12.6.7 s 170(5)......................................... 6.2.3 171.............................................. 6.3.1 172.............................................. 6.3.1 (3)......................................... 6.3.2 173–177...................................... 6.3.1 190, 193...................................... 9.8.2 754............................................ 1.2.2; 2.5 656......................................... 6.6.1, 6.6.2 859A........................................... 9.10.2.3 859H(3)...................................... 2.3.2 859K......................................... 9.6.2, 9.9 Pt 26 (ss 895–901)........ 1.4.7; 8.1, 8.3.1.1, 8.3.7.6; 12.6.5.1 s 895.............................................. 12.6.5.1 (2)......................................... 8.3.1.2 896.............................................. 8.3.1.7 (1)......................................... 8.3.2.1 (2)......................................... 8.3.1.3 897.............................................. 8.3.5.3 (1)......................................... 8.3.5.2 898.............................................. 8.3.5.3 899................................... 8.3.1.7, 8.3.7.1 (1)......................................... 8.3.6.1 (4)......................................... 8.3.8.1 899A........................................... 8.3.1.6 901(4)......................................... 8.3.4.3 Pt 26A (ss 901A–901L)............. 1.4.8; 8.1. 8.3.1.1; 12.6.6 s 901A(2), (3)................................ 8.3.1.4 (4)............................ 8.3.1.2; 12.6.6 901C........................................... 8.3.2.1 (1)........................ 8.3.1.10; 10.4.2.3

Employment Rights Act 1996........... 10.3.1 Pt III (ss 28–35)............................ 10.3.3.1 s 53, 56.......................................... 10.3.3.1

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Table of Statutes Insolvency Act 1986 – contd s A12................................... 7.6.3; 10.4.2.3 A13............................................. 7.5.2 A14............................................. 8.2.5.2 A15..................................... 7.6.4; 8.3.1.9 A18............................................. 2.4.2.3 A19............................................. 7.4.4 A20............................................. 7.4.2 A21............................................. 7.4.3 A22........................................ 2.3.6; 7.4.3 A23............................................. 7.4.3 A25............................................. 7.4.4 A26........................................ 7.4.4, 7.5.2 A27............................................. 7.4.4 A28........................................ 7.4.4, 7.5.2 A29........................................ 7.4.4, 7.5.2 A30–A32.................................... 7.4.4 A34............................................. 7.5.1.1 A35..................................... 7.3.4, 7.5.1.1 A36........................................ 7.5.2, 7.6.6 A37............................................. 7.5.2 A38........................................ 7.5.2, 7.7.1 A42............................................. 7.7.1 (5)......................................... 7.7.1 A44............................................. 7.7.2 (3)......................................... 7.7.2 (4)(c).................................... 10.4.2.3 A53(1), (2).................................. 2.4.2.3 Pt I (ss 1–7B)............................ 8.1; 12.6.4 s 1.................................................. 8.2.6.4 (1)............................................. 8.2.1 2.................................................. 8.2.2.2 3(1)(a)......................................... 8.2.2.5 (b)......................................... 8.2.2.4 (2)............................................. 10.4.2.1 (3)............................................. 8.2.2.4 4(1), (2)....................................... 8.2.4.1 (3), (4), (4A), (4B).................... 8.2.4.5 (6), (6A)......................... 8.2.4.7, 8.2.6.1 4A............................................... 8.2.4.6 5(2), (2A).................................... 8.2.5.1 (3)............................................. 8.2.5.2 6.................................................. 8.2.6.1 6A.................................... 6.4.7.4; 8.2.2.2 7.................................................. 8.2.7 7A............................................... 6.4.7.4 Pt II (ss 8–27)................................ 10.4.2.1 s 28(1)........................................... 12.6.7 29................................................ 9.3.1.1 (2)........................................... 4.3.3 33(1)........................................... 9.3.3.3 35................................................ 9.8.1 37........................................... 9.4.2, 9.4.3 (4)........................................... 2.4.5.1 38................................................ 9.6.6 39................................................ 9.5.4 s 40.............................................. 2.5; 9.7.3

Employment Rights Act 1996 – contd Pt VII (ss 64–70A)........................ 10.3.3.1 s 94, 108........................................ 10.3.2.2 182.............................................. 10.3.3.2 183(3), (4ZA)............................. 10.3.3.2 184(1)(a)–(d).............................. 10.3.3.2 Enterprise Act 2002...................... 1.2.1, 1.4.4 European Union (Withdrawal) Act 2018.......................................... 12.2.1 Finance Act 2020 s 99(3)........................................... 2.5 Sch 13............................................ 6.4.6 para 2, 3, 5................................. 6.4.6 Financial Services Act 2021 s 41................................................ 9.10.1 Financial Services and Markets Act 2000 s 215(2A)...................................... 2.5 359.............................................. 4.3.6.1 362(1)(a)–(c)................... 4.3.4.1, 4.3.5.1 362A........................................... 4.3.4.1 367.................................... 4.4.1.1, 4.11.8 Housing Act 1996 Pt 1 (ss 1–64)........................ 7.2.3; 9.3.2.2 Insolvency Act 1986.............................. 1.2.1, 1.2.2, 1.2.4, 1.2.5, 1.5.1, 1.5.2, 1.5.3; 2.4.3.2, 2.4.4.2; 3.4.7, 3.8.2; 4.9.1; 5.1.1, 5.1.2; 6.2.3, 6.4.7.3, 6.4.8; 7.4.5; 8.2.5.4, 8.3.1.1, 8.3.1.10, 8.3.6.3; 9.8.3.2; 11.6.1.3; 12.6.2, 12.6.5.1, 12.6.6 Pt A1 (ss A1–A55).................. 1.4.1, 1.4.5, 1.4.6; 2.1.2, 2.3.6, 2.4.2, 2.4.2.1, 2.4.2.3, 2.4.3.2; 4.3.4.1, 4.3.6.4; 7.1, 7.2.1, 7.3.1, 7.3.3, 7.4.1, 7.4.2, 7.4.3, 7.4.5, 7.5.2; 8.2.4.5, 8.2.5.2, 8.3.1.6, 8.3.1.9; 9.10.2.1; 10.2.1, 10.2.7, 10.2.8.1, 10.4.2.1, 10.4.2.3; 12.6.3 s A5............................................... 12.6.3 A6............................................... 7.3.2 (1)(e)...................................... 7.3.4 A7.......................................... 7.3.2, 7.3.3 A8.................................. 7.5.1.1; 10.4.2.3 A9............................................... 7.6.1 A10............................................. 7.6.2 A11............................................. 7.6.3

xii

Table of Statutes Insolvency Act 1986 – contd s 42................................................ 9.8.1 43................................................ 9.8.3.1 44.......................................... 9.4.2, 9.4.3; 10.3.4.2 (1)(a)....................................... 9.4.1 45(3)........................................... 2.4.5.1 (4)........................................... 9.9 46(1)........................................... 9.6.2 47........................................ 6.7.3.3; 9.6.3 48................................................ 9.6.4 49................................................ 9.6.5 72A............................................. 9.3.2.1 72B–72DA, 72E–72G................9.3.2.1, 9.3.2.2 72GA.......................................... 9.3.2.2 74(2)(f)................................... 2.1.2, 2.10 84(1), (2A), (3)........................... 3.3.1 85, 86.......................................... 3.3.1 87................................................ 3.5.2 88................................................ 3.5.3 89................................... 3.3.2.1; 10.4.2.1 90................................................ 3.3.2.1 91(2)........................................... 6.7.1.1 92, 92A....................................... 3.9.1 94................................................ 3.13.1.1 95................................................ 3.3.2.2 96................................................ 10.4.2.1 99................................................ 6.7.3.1 100................................. 2.11.3.3, 2.11.4; 3.3.3.1 (3)......................................... 3.3.3.8 101.............................................. 3.9.2.1 103.............................................. 6.7.1.1 104A........................................... 3.9.2.3 106.............................................. 3.13.1.1 107............................... 2.1.2, 2.7.2; 3.7.1 108(2)......................................... 3.9.4 112......................................... 3.5.4, 3.9.3 114................................... 3.3.3.9; 6.7.1.1 115................................... 2.4.3.1, 2.4.3.2 122(1)......................................... 3.4.1 (a), (f), (g)........................ 3.4.1 123............................ 1.3.1, 1.5.4; 2.7.3.3 (1)(a), (b), (e)........................ 1.3.1 (2).................................... 1.3.1, 1.3.4 124.............................................. 3.4.2 125.............................................. 4.3.6.5 (1)......................................... 3.4.4.4 127..................................... 3.4.4.2; 4.5.1; 5.1.2, 5.7.5 (1).................................... 3.5.3; 5.7.1 (2), (3)................................... 5.7.1 129.............................................. 5.7.1 130(2)......................................... 3.5.4 131................................... 3.4.6.1; 6.7.3.1 132.............................................. 3.7.2

Insolvency Act 1986 – contd s 135.................................... 3.4.5; 11.6.1.3 (4)......................................... 3.4.5 136(2)......................................... 3.4.6.1 (5)(a)–(c).............................. 3.4.6.2 137.............................................. 3.4.6.2 140.............................................. 3.4.6.1 143......................................... 2.1.2; 3.7.1 144.............................................. 3.7.2 146.............................................. 3.13.1.2 148.............................................. 3.7.2 156.............................................. 2.4.3.2 164(1)......................................... 3.6.3 165.............................................. 3.8.1 (4), (5)................................... 3.7.2 166.............................................. 3.3.3.9 167.............................................. 3.8.1 (1)......................................... 3.5.2 (3).................................... 3.7.3, 3.9.3 168(5)......................................... 3.9.3 171(6), (7)................................... 3.13.1.1 172(8)......................................... 3.13.1.2 173(2)(d)..................................... 3.13.3 (e)......................... 3.13.1.1, 3.13.3 (4)......................................... 3.13.3 174(4)(d)......................... 3.13.1.2, 3.13.3 (6)......................................... 3.13.3 174A.................................. 2.1.2, 2.4.2.1, 2.4.2.3 (1)...................................... 2.4.2.1 (2)(a).................................. 2.4.2.2 (b).................................. 2.4.2.3 (3)...................................... 2.4.2.3 175............................................ 2.1.2, 2.5 176ZA................................. 2.1.2, 2.4.3.1 (2)(a)................................ 2.4.3.1 (4).................................... 2.4.3.2 176A............................ 2.1.2, 2.6.1, 2.6.3 176ZB................................. 5.2.7; 6.4.2.4 177.............................................. 3.4.7 178.............................................. 3.6.1 (4)......................................... 3.6.2 (5)......................................... 3.6.3 (6)......................................... 3.6.4 179.............................................. 3.6.1 181......................................... 3.6.1, 3.6.4 182.............................................. 3.6.4 188.............................................. 3.5.6 189............................................ 2.1.2, 2.8 201, 202, 205.............................. 3.13.2 212............................ 3.7.4, 3.13.3; 5.2.6; 6.4.4 213..................................... 3.8.1; 6.4.3.1, 6.4.3.2 214........................................ 1.5.3; 3.8.1; 6.4.2.1, 6.4.2.4, 6.4.3.1; 11.8.1

xiii

Table of Statutes Insolvency Act 1986 – contd s 214(3)......................................... 6.4.2.3 (4)......................................... 6.4.2.2 214A........................................... 1.5.3 216..................................... 3.2.2; 6.4.5.1, 6.4.5.2, 6.4.5.3 (2)......................................... 6.4.5.2 (3)......................................... 6.4.5.3 (6)......................................... 6.4.5.2 217.................................. 6.4.5.1, 6.4.5.2, 6.4.5.3, 6.4.6 220....................................... 1.5.4; 12.6.1 221....................................... 1.5.4; 12.6.1 222–224...................................... 1.5.4 230.............................................. 9.3.1.1 231(1)......................................... 3.8.5 (2)......................................... 9.3.3.3 232.............................................. 9.3.4 233.............................. 3.8.2; 4.9.1, 4.9.2, 4.9.3, 4.9.4.7; 7.4.5; 8.2.5.4, 8.3.1.10; 9.8.3.2 233A........................... 3.8.2; 4.9.1, 4.9.3, 4.9.4.1, 4.9.4.3, 4.9.4.7; 7.4.5; 8.2.5.4, 8.3.1.10; 9.8.3.2 233B..................................... 3.5.5, 3.8.2; 4.5.5, 4.9.1, 4.9.4, 4.9.4.1, 4.9.4.3, 4.9.4.5, 4.9.4.6, 4.9.4.7; 8.2.5.4, 8.3.1.8, 8.3.1.10; 9.5.3, 9.8.3.2; 12.3.4 (3)............................... 4.9.1, 4.9.4.1 (4)............................... 4.9.1, 4.9.4.2 (5).............................. 4.9.4.6; 7.4.5; 8.2.5.4, 8.3.1.10 (7)............................... 4.9.1, 4.9.4.4 234..................................... 3.8.3, 3.8.3.1, 3.8.3.2; 4.8.5; 9.8.3.3 (3), (4)................................... 10.5.4 235.............................. 3.8.3; 4.8.5; 6.7.2; 9.8.3.3 236..................................... 3.8.3, 3.8.3.2; 4.8.5; 9.8.3.3 237.............................................. 3.8.3.2 238.............................. 3.8.1; 5.1.2, 5.2.1, 5.2.3, 5.2.7, 5.4.2; 12.3.5 (5).................................... 5.2.3, 5.4.2 239.............................. 3.8.1; 5.1.2, 5.3.1, 5.3.2, 5.3.7; 11.6.1.1; 12.3.5 240(3)......................................... 5.1.3 241.............................................. 5.2.6 244............................. 5.1.2, 5.5.1; 12.3.5

Insolvency Act 1986 – contd s 245........................................ 5.1.2, 5.6.1; 9.10.2.2; 11.6.1.1; 12.3.5 246A................................ 3.3.3.4; 4.6.5.3 246ZA......................................... 6.4.3.1 246ZB......................................... 6.4.2.1 (3).................................... 6.4.2.3 (4).................................... 6.4.2.2 246B........................................... 4.6.1 246C................................... 3.9.2.4; 4.6.1 246ZD......................... 3.8.4; 4.8.1, 4.8.6; 5.2.7; 7.5.3 246ZE............................. 3.3.3.2; 4.6.5.2; 8.2.2.4 (11).................................. 7.6.3 246E............................................ 3.3.3.1 (3), (6)..................... 3.3.3.5; 4.6.5.4 246ZF............................. 3.3.3.1, 3.3.3.4; 4.6.5.3; 8.2.2.4 (5)(b)..................... 3.3.3.4; 4.6.5.3 249.............................................. 5.8 251............................... 2.3.6; 6.2.2, 6.2.3 423.............................. 5.1.2, 5.2.2, 5.2.5, 5.4.1, 5.4.2, 5.4.3, 5.4.4; 12.3.5, 12.5 426.............................. 12.1, 12.4, 12.4.1, 12.4.2, 12.5, 12.6.2, 12.6.4 (1)–(4)................................... 12.4.1 (5)......................................... 12.4.2 (11)....................................... 12.4.1 435.............................................. 5.8 (10)(b)................................... 5.8 436.............................................. 2.2.1 Sch ZA1...................... 6.4.2.4; 7.2.1, 7.2.2 Sch B1.................................... 1.2.1; 12.6.2 para 1(2).................................... 4.3.1 3......................................... 4.2.1 (2).................................... 4.7.1 5......................................... 4.7.1 11....................................... 4.3.6.5 12....................................... 4.3.6 (1).................................. 4.3.6.1 (2).................................. 4.3.6.4 (4).................................. 4.3.6.1 13....................................... 4.3.6 (1).................................. 4.3.6.5 14....................................... 4.3.5 (1).................................. 4.3.3 15............................... 4.3.5, 4.3.5.2 16............................... 4.3.5, 4.3.5.1 17..................... 4.3.5, 4.3.5.1; 9.5.1 18, 19......................... 4.3.5, 4.3.5.3 20, 21................................. 4.3.5 22....................................... 4.3.4 23............................... 4.3.4, 4.3.4.1

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Table of Statutes Insolvency Act 1986 – contd para 74(1), (2)........................... 4.7.2.1 75............................. 4.7.2.2, 4.11.9 76............................. 4.9.4.2, 4.11.2 (2)(a), (b)....................... 4.11.2 77, 78....................... 4.9.4.2, 4.11.2 79....................................... 4.9.4.2 (1), (2)........................... 4.11.5 (3).................................. 4.11.6 80............................. 4.9.4.2, 4.11.6 81............................. 4.9.4.2, 4.11.7 82............................. 4.9.4.2, 4.11.8 83............................. 4.9.4.2, 4.11.3 (3).................................. 10.4.2.1 84.............................4.9.4.2, 4.11.4 88............................. 4.7.2.1, 4.10.5 97....................................... 4.10.5 98....................................... 4.11.9 99........................... 2.4.4.1, 2.4.4.3; 4.8.2 (5), (6)........................... 10.3.4.1 100(2).................... 4.3.4.5, 4.3.5.3, 4.3.5.4, 4.8.7 107............................. 4.6.4, 4.6.5.1 111............................. 4.4.1.2, 4.8.3 (1)................................ 4.2.1 (1A)............................. 12.6.2 Sch 1......................................... 4.8.1; 9.8.1 para 13....................................... 4.8.2 Sch 2A para 1, 2, 6, 7............................. 9.3.2.2 Sch 4......................................... 3.4.5, 3.8.1 Sch 4ZZA...................................... 4.9.4.7 Pt 1 (para 1)............................... 4.9.1 Sch 6.............................................. 2.5 para 8–11, 15A, 15AA, 15B, 15BA, 15BB, 15D..................... 2.5

Insolvency Act 1986 – contd para 24....................................... 4.3.4 25..................... 4.3.4, 4.3.4.1; 9.5.1 25A.................................... 4.3.4.1 26, 27................................. 4.3.4 28............................... 4.3.4, 4.3.4.3 29....................................... 4.3.4 (2).................................. 4.3.4.4 (3).................................. 4.3.4.5 30–34................................. 4.3.4 35, 36................................. 4.3.6.6 39....................................... 9.5.1 40....................................... 5.7.1 (1)–(3)........................... 4.5.1 41....................................... 4.5.2 42....................................... 4.4.1.1 43(6A)............................... 4.4.1.1 (7).................................. 4.4.3 44............................... 4.4.1.3; 7.6.6 (2).................................. 4.3.5.2 (4).................................. 4.3.4.3 45....................................... 4.5.6 46....................................... 4.6.2 47............................... 4.6.3; 6.7.3.2 48....................................... 6.7.3.2 49............................. 4.6.4, 4.12.6.3 51....................................... 4.6.5.1 (1).................................. 4.12.6.3 52....................................... 4.6.5.7 (2).................................. 4.12.6.3 53....................................... 4.6.5.1 (2).................................. 4.6.5.8 54....................................... 4.6.5.8 55....................................... 4.6.5.9 56....................................... 4.10.1 57............................. 4.6.5.2, 4.10.2 59(3).................................. 4.8.1 60....................................... 4.8.1 60A............................. 4.8.1, 4.12.5 (3)............................... 4.12.6.2 (4)(a), (b).................... 4.12.6.2 62....................................... 4.8.1 63............................... 4.6.5.8, 4.8.1 64............................... 4.5.3; 6.7.1.2 64A............................ 2.4.2.1; 4.8.2 65..................................... 2.5; 4.8.2 66.................................. 2.7.2; 4.8.2 67....................................... 4.7.1 68................................ 4.7.1, 4.10.4 (3).................................. 4.6.5.8 69....................................... 4.8.8 70............................. 4.8.3; 9.10.2.1 71.............................. 4.7.2.1, 4.8.3; 9.10.2.1 72............................... 4.7.2.1, 4.8.3 73....................................... 4.6.4 74....................................... 7.7.1

Judgments Act 1838 s 17................................................ 2.8 Law of Property Act 1925...........  1.2.4; 9.8.1 s 109(2)......................................... 9.4.1 Limitation Act 1980.......................... 3.5.4 Limited Liability Partnerships Act 2000..................................... 1.5.1, 1.5.3 Limited Partnerships Act 1907.......... 1.5.1 Magistrates’ Courts Act 1980 s 87A..................................... 3.4.2; 4.3.6.1 Partnership Act 1890 s 1.................................................. 1.5.1 Pensions Act 1995 s 75................................... 10.4.1, 10.4.2.1; 11.8.2.2, 11.8.5.1, 11.8.5.2 (4)........................................... 10.4.1

xv

Table of Statutes Pensions Act 2004............................. 11.8.3.1 s 38................................................ 11.8.2.2 (3)(d)....................................... 11.8.2.3 (7)........................................... 11.8.2.3 42................................................ 11.8.4.1 42A............................................. 11.8.3.1 43................................................ 11.8.2.1 (5)(b)....................................... 11.8.2.3 (7)........................................... 11.8.2.3 46................................................ 11.8.4.1 47................................................ 11.8.2.2 58A, 58B.................................... 11.8.3.1 69................................................ 11.8.1 121.............................................. 10.4.2.1 126.............................................. 7.5.1.1 135(2), (3)................................... 10.4.2.1 137.............................................. 10.4.2.1 Pension Scheme Act 1993 Sch 4.............................................. 2.5 Railways Act 1993 s 59................................................ 9.3.2.2 Reserve Forces (Safeguard of Employment) Act 1985............. 2.5

Sale of Goods Act 1979.................... 10.5.2.2 s 19................................................ 10.5.1 25................................................ 10.5.3 Trade Union and Labour Relations (Consolidation) Act 1992.......... 10.3.1 s 188............................... 10.3.2.3, 10.3.4.1 (7)......................................... 10.3.2.3 189.............................. 10.3.2.3, 10.3.2.5, 10.3.3.1 193, 194...................................... 10.3.2.5 Transport Act 2000 s 26................................................ 9.3.2.2 Tribunals, Courts and Enforcement Act 2007..................... 10.2.4.1, 10.2.8.2 s 81.................................... 10.2.1, 10.2.8.2 Water Industry Act 1991 Pt II Ch I (ss 6–17)........................ 9.3.2.2 UNITED STATES Bankruptcy Code Ch 11................................ 7.1; 12.3.3, 12.5 Ch 15............................................. 12.6.5.2

xvi

Table of Statutory Instruments [All references are to paragraph number]

Administration (Restrictions on Disposal etc to Connected Persons) Regulations 2021, SI 2021/174................... 4.12.6.1, 4.12.6.2, 4.12.7.1

Financial Markets and Insolvency (Settlement Finality) Regulations 1999, SI 1999/2979...................7.4.3, 7.4.4; 9.3.2.2 reg 16............................................ 3.6.3

Co-operation of Insolvency Courts (Designation of Relevant Countries and Territories) Order 1986, SI 1986/2123......... 12.4.1 Co-operation of Insolvency Courts (Designation of Relevant Countries) Order 1996, SI 1996/253................................... 12.4.1 Co-operation of Insolvency Courts (Designation of Relevant Country) Order 1998, SI 1998/2766................................. 12.4.1 Cross Border Insolvency Regulations 2006, SI 2006/1030... 12.1, 12.3, 12.3.1, 12.3.2, 12.3.4, 12.3.7, 12.5, 12.6.7 Sch 1 Art 1.......................................... 12.3.2 2, 4...................................... 12.3.3 10, 12, 13............................ 12.3.5 17, 20.................................. 12.3.3 21........................................ 12.3.4 23........................................ 12.3.5 25, 26.................................. 12.3.6 28........................................ 12.3.3 29, 30.................................. 12.3.6 Financial Collateral Arrangements (No 2) Regulations 2003, SI 2003/3226................. 1.2.6; 7.4.3, 7.4.4; 9.1, 9.10, 9.10.1; 10.2.8.1 reg 4.............................................. 9.10.2.3 8.............................................. 9.10.2.1 10............................................ 9.10.2.2 17(1), (2)................................. 9.10.2.1 18(1), (2)................................. 9.10.2.1 Financial Markets and Insolvency Regulations 1996, SI 1996/ 1469........................ 7.4.3, 7.4.4; 9.3.2.2

Insolvency Act 1986 (Prescribed Part) (Amendment) Order 2020, SI 2020/211..................... 2.6.2 Insolvency Act 1986 (Prescribed Part) Order 2003, SI 2003/2097............................ 2.6.2, 2.6.3 Insolvency (Amendment) (EU Exit) Regulations 2019, SI 2019/146.12.2.1 Insolvency (England and Wales) Rules 2016, SI 2016/1024... 1.2.5, 1.2.7, 1.5.3; 2.4.3.2, 2.4.4.2 r 1.39............................................. 3.9.2.4 1.45..................................... 3.3.3.3; 4.6.1 1.49, 1.50.................................... 4.6.1 1A.4....................................... 7.3.2; 7.6.6 1A.5............................................ 7.3.2 1A.8–1A.10................................ 7.3.3 1A.27.......................................... 7.5.3 2.3.................................... 8.2.2.3, 8.2.3.1 2.6............................................... 8.2.2.2 2.25............................................. 8.2.2.5 (5), (7).................................. 8.2.2.4 2.26, 2.27.................................... 8.2.2.4 2.28, 2.30.................................... 8.2.2.5 2.31............................................. 8.2.2.4 2.34............................................. 8.2.4.1 2.38............................................. 8.2.4.7 2.39, 2.41, 2.44........................... 8.2.7 3.3....................................... 4.3.6, 4.3.6.3 3.4, 3.5........................................ 4.3.6 3.6....................................... 4.3.6, 4.3.6.3 (4)........................................... 4.3.6.6 3.7............................................... 4.3.6 3.8, 3.9................................ 4.3.6, 4.3.6.4 3.10–3.15.................................... 4.3.6 3.16............................................. 4.3.5 (2), (4).................................. 4.3.5.2 3.17............................................. 4.3.5 (1)......................................... 4.3.5.3 3.18..................................... 4.3.5, 4.3.5.3

xvii

Table of Statutory Instruments Insolvency (England and Wales) Rules 2016, SI 2016/1024 – contd r 3.19............................................. 4.3.5 3.20............................................. 4.3.5 (9)......................................... 4.3.5.4 3.21............................................. 4.3.5 (1), (2).................................. 4.3.5.4 3.22............................................. 4.3.5 (2)(a), (b)............................. 4.3.5.4 3.23............................................. 4.3.4 (1)(ea).................................. 4.3.4.1 (2)......................................... 4.3.4.5 3.24............................................. 4.3.4 (1)......................................... 4.3.4.4 3.25............................................. 4.3.4 (1)......................................... 4.3.4.4 (2)......................................... 4.3.4.4 (2)(ea).................................. 4.3.4.1 3.26............................................. 4.3.4 (1), (2).................................. 4.3.4.5 3.27............................................. 4.6.2 3.31............................................. 6.7.3.2 3.35............................................. 4.6.4 (9), (10)................................ 4.6.4 3.36............................................. 4.6.4 3.38............................................. 4.6.5.1 3.39............................................. 4.6.5.2 3.41............................................. 4.6.5.8 3.44........................................ 4.6.3, 4.6.4 3.45............................................. 4.6.3 3.51............................................. 2.4.4.2 (2)(j)..................................... 2.4.4.2 (3)......................................... 2.4.4.2 3.52................................... 2.4.4.2; 4.12.9 3.56............................................. 4.11.6 4.1............................................... 9.3.3.3 4.8............................................... 6.7.3.3 4.14............................................. 9.6.4 4.17............................................. 9.6.6 6.11, 6.12.................................... 3.3.2.2 6.14............................................. 3.3.3.2 (4)......................................... 3.3.3.4 (7).............................. 3.3.3.2; 6.7.3.1 (8)......................................... 3.3.3.2 6.18............................................. 3.3.3.6 6.19............................................. 3.3.3.2 6.28............................................. 3.13.1.1 (2)......................................... 3.13.1.1 6.42............................................. 2.4.3.2 6.44–6.48.................................... 2.4.3.3 7.2, 7.3........................................ 3.4.3.1 7.4–7.12...................................... 3.4.4 7.13..................................... 3.4.4, 3.4.4.3 7.14–7.24.................................... 3.4.4 7.48............................................. 3.4.6.1 7.71............................................. 3.13.1.2 (2)......................................... 3.13.1.2

Insolvency (England and Wales) Rules 2016, SI 2016/1024 – contd r 7.76, 7.79.................................... 3.7.2 14.1, 14.2............................. 3.10.2; 4.8.2 14.3............................................. 4.8.2 (1)–(3).................................. 3.10.1 14.4...................................... 3.10.1; 4.8.2 14.5............................................. 4.8.2 14.6, 14.7............................. 3.10.5; 4.8.2 14.8, 14.9.................................... 4.8.2 14.10, 14.11......................... 3.10.5; 4.8.2 14.12...................................... 2.7.2; 4.8.2 14.13........................................... 4.8.2 14.14.............................. 2.11.3.2; 3.10.6, 3.12.1; 4.8.2 14.15........................................... 4.8.2 14.16.................................... 3.10.4; 4.8.2 14.17–14.19................................ 4.8.2 14.20.................................... 3.10.6; 4.8.2 14.21............................. 2.9; 3.10.6; 4.8.2 14.22.................................... 3.10.6; 4.8.2 14.23............................... 2.8, 2.9; 3.10.6; 4.8.2 14.24.................................... 2.11.4; 4.8.2 14.25................................. 2.11.3.1; 4.8.2 (6)....................................... 2.11.3.3 14.26, 14.27................................ 4.8.2 14.28........................................... 4.8.2 (1)(c).................................. 3.12.2 14.29–14.43................................ 4.8.2 14.44.................................... 3.10.6; 4.8.2 14.45........................................... 4.8.2 14.27–14.30................................ 3.11.1 14.32–14.35................................ 3.11.1 14.36–14.38................................ 3.11.2 14.40........................................... 3.11.1 Pt 15 (rr 15.1–15.46)..................... 3.3.3.1 15.2(1)............................. 3.3.3.4, 3.9.2.2; 4.6.5.3 15.3................................. 3.3.2.2, 3.9.2.2; 4.6.5.3; 8.2.2.4 15.4............................................. 3.9.2.2 15.6(6).............................. 3.3.3.5; 4.6.5.4 15.8................................. 3.3.3.2; 4.6.5.2; 8.2.2.4 15.20–15.27.................... 3.3.3.6; 4.6.5.5; 8.2.4.2 15.28............................... 3.3.3.6; 4.6.5.5; 8.2.4.2 (5)....................................... 8.2.4.2 15.29, 15.30.................... 3.3.3.6; 4.6.5.5; 8.2.4.2 15.31............................... 3.3.3.6; 4.6.5.5; 8.2.4.2 (2)............................ 3.3.3.6; 4.6.5.5 (3).......................... 8.2.4.2; 10.2.5.1 (4), (5)..................... 4.6.5.5; 8.2.4.2

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Table of Statutory Instruments Insolvency (England and Wales) Rules 2016, SI 2016/1024 – contd r 15.31(6)....................................... 4.6.5.5 15.32, 15.33.................... 3.3.3.6; 4.6.5.5; 8.2.4.2 15.34............................... 3.3.3.6; 4.6.5.5; 7.6.3; 8.2.4.2 15.35............................... 3.3.3.6; 4.6.5.5; 8.2.4.2 16.1–16.9........................ 3.3.3.7; 4.6.5.6; 8.2.4.3 17.3–17.23........................ 3.9.2.1; 4.10.2 17.24............................... 2.4.3.2, 2.4.4.2; 3.9.2.1; 4.10.2 17.25–17.27...................... 3.9.2.1; 4.10.2 17.27A........................................ 3.9.2.1 Pt 18 (rr 18.1–18.38)..................... 2.4.4.2 r 18.6............................................. 4.6.6 18.7..................................... 3.9.1, 3.9.2.3 18.8............................................. 3.9.2.3 18.9.................................. 3.9.2.5, 3.13.3; 4.10.3 18.14............................ 3.13.1.1, 3.13.1.2 18.18........................................... 4.10.3 18.19........................................... 3.9.1 18.20........................................... 3.9.2.5 18.30................................. 3.9.2.5; 4.10.3 18.34.....................3.9.2.5, 3.13.3; 4.10.3 19.1–19.7.................................... 3.6.1 21.3............................................. 10.4.2.1 21.4, 21.5.................................... 12.2.3 22.4–22.7.................................... 6.4.5.3 Sch 4 para 2......................................... 3.4.4.1 Sch 11............................................ 2.4.3.2 Insolvency Regulations 1994, SI 1994/2507 reg 10............................................ 3.7.2

Insolvent Companies (Reports on Conduct of Directors) Rules 2016, SI 2016/180..................... 6.4.7.4 Insolvent Partnerships Order 1994, SI 1994/2421........................ 1.2.6, 1.5.2 Limited Liability Partnerships Regulations 2001, SI 2001/1090..1.5.1, 1.5.3 Occupational Pension Scheme (Employer Debt) Regulations 2005, SI 2005/678.....................  11.8.5.1, 11.8.5.2 reg 7A............................................ 11.8.5.2 Pension Protection Fund (Entry Rules) Regulations 2005, SI 2005/590................................... 10.4.2.1 Pension Protection Fund (Moratorium and Arrangements and Reconstructions for Companies in Financial Difficulty) Regulations 2020, SI 2020/693................................... 10.4.2.3 Pensions Regulator (Notifiable Events) Regulations 2005, SI 2005/900................................... 11.8.1 Transfer of Undertakings (Protection of Employment) Regulations 2006, SI 2006/2405.........4.12.3; 10.3.1, 10.3.5.1, 10.3.5.2 reg 4............................... 10.3.5.1, 10.3.5.2 (4).......................................... 10.3.5.1 7............................... 10.3.5.1, 10.3.5.2 8(2)–(7)................................... 10.3.5.2 9.............................................. 10.3.5.2

xix

Table of Cases [All references are to paragraph number]

19 Entertainment Ltd, Re [2016] EWHC 1545 (Ch), [2017] BCC 347.........................12.3 4Eng Ltd v Harper [2009] EWHC 2633 (Ch), [2010] BCC 746, [2010] 1 BCLC 176..5.4.4 A A & J Fabrications (Batley) Ltd v Grant Thornton (a firm) (No 1) [1999] BCC 807, [1998] 2 BCLC 227, [2000] Lloyd’s Rep PN 565..................................................3.7.4 AA Mutual International Insurance Co Ltd, Re [2004] EWHC 2430 (Ch), [2005] 2 BCLC 8...................................................................................................................4.3.6.5 ABT Auto Investments v Aapico Pte Ltd [2022] EWHC 2839 (Comm)........................ 9.10.1 AE Realisations (1985) Ltd, Re [1988] 1 WLR 200, [1987] 3 All ER 83, (1987) 3 BCC 136 ................................................................................................................10.2.4.4 AEI Cables Ltd v GMB [2013] UKEAT/0375/12..........................................................10.3.2.3 AES Barry Ltd v TXU Europe Energy Trading (in administration) [2004] EWHC 1757 (Ch), [2005] 2 BCLC 22................................................................................4.4.3 Active Wear Ltd, Re [2022] EWHC 2340 (Ch), [2022] 7 WLUK 653..........................4.3.4.5 Advent Computer Training Ltd, Re see Gould v Advent Computer Training Ltd Agnew v Comrs of Inland Revenue see Re Brumark Investments Ltd Agricultural Mortgage Corpn plc v Woodward [1994] BCC 688, [1995] 1 BCLC 1, [1996] 1 FLR 226....................................................................................................5.2.2 Airbase (UK) Ltd, Re see Thorniley v R & C Comrs Airlines Airspares v Handley Page [1970] Ch 193, [1970] 2 WLR 163, [1970] 1 All ER 29......................................................................................................................9.5.3 Akers v Samba Financial Group [2017] UKSC 6, [2017] AC 424, [2017] 2 WLR 713..........................................................................................................................5.7.2 Akkurate Ltd (in liquidation), Re [2020] EWHC 1433 (Ch), [2021] Ch 73, [2020] 3 WLR 1077 ..............................................................................................................3.8.3.2 Allders Department Stores Ltd (in administration), Re [2005] EWHC 172 (Ch), [2005] 2 All ER 122, [2005] BCC 289...................................................................10.3.4.1 All Scheme Ltd, Re [2022] EWHC 549 (Ch), [2022] 3 WLUK 189..................8.3.1.5, 8.3.7.4 Altitude Scaffolding Ltd, Re [2006] EWHC 1401 (Ch), [2006] BCC 904, [2007] 1 BCLC 199 ..............................................................................................................8.3.6.4 American Express International Banking Corpn v Hurley [1985] 3 All ER 564, (1986) 2 BCC 98993, [1986] BCLC 52.............................................................................9.4.1 Amicus Finance plc, Re [2021] EWHC 2255 (Ch), [2021] 7 WLUK 49.......................8.3.1.3 Amicus Finance plc (in administration), Re [2021] EWHC 3036 (Ch), [2022] Bus LR 86, [2021] 11 WLUK 447.......................................................................................8.3.7.7 Andrabell Ltd, Re [1984] 3 All ER 407..........................................................................10.5.2.1 Antony Gibbs & Sons v Societe Industrielle et Commerciale des Metaux (1890) 25 QBD 399, [1890] 6 WLUK 82................................................................................12.3 Apcoa Parking Holdings GmbH, Re [2014] EWHC 3849 (Ch), [2015] 4 All ER 572, [2016] 1 All ER (Comm) 30......................................................................8.3.3.2; 12.6.5.1 Arbuthnot Leasing International Ltd v Havelet Leasing Ltd (No 2) [1990] BCC 636...5.4.3 Arlington Infrastructure Ltd (in administration) v Woolrych [2020] EWHC 3123 (Ch), [2021] 2 All ER (Comm) 999, [2020] 11 WLUK 261..................................4.3.5.2 Armstrong Whitworth Securities Co Ltd, Re [1947] Ch 673, [1947] 2 All ER 479, [1948] LJR 172.......................................................................................................3.12.2

xxi

Table of Cases Aro Co Ltd, Re [1980] Ch 196, [1980] 2 WLR 453, [1980] 1 All ER 1067..................3.5.4 Assénagon Asset Management SA v Irish Bank Resolution Corpn Ltd (formerly Anglo Irish Bank Corpn Ltd) [2012] EWHC 2090 (Ch), [2013] 1 All ER 495, [2013] Bus LR 266..................................................................................................11.3.2.5 Assico Engineering Ltd (in liquidation), Re [2002] BCC 481, [2002] BPIR 15............3.3.3.6 Astor Chemicals Ltd v Synthetic Technology Ltd [1990] BCC 97, [1990] BCLC 1.....4.5.5 A Straume (UK) Ltd v Bradlor Developments Ltd [2000] BCC 333, (2000) 2 TCLR 409..........................................................................................................................4.4.1.2 A Wear UK Ltd (in administration), Re [2013] EWCA Civ 1626, [2014] 1 EGLR 9, [2014] 1 P & CR DG15.....................................................................................4.5.5; 9.5.3 Athinaiki Chartopoiia AE v Panagiotidis (Case C-270/05) [2007] ECR I-1499, [2007] IRLR 284................................................................................................................10.3.2.3 Atlantic Computer Systems plc, Re [1992] Ch 505, [1992] 2 WLR 367, [1992] 1 All ER 476, [1991] BCLC 606.................................................. 2.4.5.2; 4.4.2, 4.4.3; 10.2.3.3 Auto Management Services Ltd v Oracle Fleet UK Ltd [2007] EWHC 392 (Ch), [2008] BCC 761......................................................................................................4.3.6.5 Ayerst (Inspector of Taxes) v C & K (Construction) Ltd [1976] AC 167, [1975] 3 WLR 16, [1975] 2 All ER 537................................................................................2.1.1 Azevedo v Importacao Exportacao e Industria de Oleos Ltda [2013] EWCA Civ 364, [2015] QB 1, [2014] 3 WLR 1124..........................................................................11.3.2.5 B BIS v Smith, Peto & Wright (Coventry Magistrates’ Court, 13 November 2015).........10.3.2.5 BNY Corporate Trustee Services Ltd v Eurosail-UK 2007-3BL plc [2011] EWCA Civ 227, [2011] 1 WLR 2524, [2011] 3 All ER 470..........................................1.3.3, 1.3.4 BTI 2014 LLC v Sequana SA [2019] EWCA Civ 112, [2019] 2 All ER 784, [2019] 2 All ER (Comm) 13; aff’d [2022] UKSC 25, [2022] 3 WLUK 709, [2022] 10 WLUK 7 ........................................................................................5.2.4, 5.4.4; 6.3.2, 6.3.3 BXL Services, Re [2012] EWHC 1877 (Ch), [2012] CC 657, [2012] WTLR 1695......4.3.4.2 BW Estates Ltd, Re [2017] EWCA Civ 1201, [2017] BCC 406....................................4.3.4.5 Baden, Delvaux & Lecuit v Société Générale pour Favoriser le Développement etc [1983] BCLC 325...................................................................................................12.5 Bailey v Angove’s Pty see D & D Wines International Ltd (in liquidation), Re Bank of Baroda v Panessar [1987] Ch 335, [1987] 2 WLR 208, [1986] 3 All ER 751..9.3.3.2 Bank of Credit & Commerce International SA (in liquidation) (No 11), Re [1997] Ch 213, [1997] 2 WLR 172, [1996] 4 All ER 796.......................................................2.11.3.1 Bank of India v Morris [2005] EWCA Civ 693..............................................................6.4.3.1 Barclays Mercantile Business Finance Ltd v Sibec Developments Ltd [1992] 1 WLR 1253, [1993] 2 All ER 195, [1993] BCC 148.........................................................10.5.3 Barn Crown Ltd, Re [1995] 1 WLR 147, [1994] 4 All ER 42, [1994] BCC 381...........5.7.4.1 Barton Manufacturing Co Ltd [1998] BCC 827, [1999] 1 BCLC 740...........................5.2.3 Bayoil, Re [1998] BCC 988............................................................................................3.4.3.2 Belmont Park Investments Pty Ltd v BNY Corporate Trustee Services Ltd & Lehman Brothers Special Financing Inc [2011] UKSC 38...................................................2.7.3.1 Bernard L Madoff Investment Securities LLC, Re [2010] EWHC 1299 (Ch), [2011] 1 BCLC 129...............................................................................................................12.3 Bilta UK Ltd (in liquidation) v NatWest Markets plc [2020] EWHC 546 (Ch), [2020] 3 WLUK 159...........................................................................................................6.4.3.1 Bloom v Pensions Regulator [2013] UKSC 52, [2014] AC 209, [2013] 3 WLR 504........2.1.1, 2.4.4.2; 3.10.2; 11.8.2.4 Bluebrook Ltd, Re [2009] EWHC 2114 (Ch), [2010] BCC 209, [2010] 1 BCLC 338 ...8.3.4.2; 11.6.2.2 BlueCrest Mercantile BV v Vietnam Shipbuilding Industry Group [2013] EWHC 1146 (Comm) .........................................................................................................8.3.1.9 Blue Monkey Gaming Ltd v Hudson [2014] WL 4355075...................................10.5.3, 10.5.4 Bluestone Chemicals Ltd v Environment Agency see Re Celtic Extraction Ltd (in liquidation)

xxii

Table of Cases Borden (UK) Ltd v Scottish Timber Products Ltd [1981] Ch 25, [1979] 3 WLR 672, [1979] 3 All ER 961................................................................................................10.5.2.1 Bournemouth & Boscombe AFC Co Ltd, Re [1998] BPIR 183.....................................8.2.6.1 Bresco Electrical Services Ltd (in liquidation) v Lonsdale (Electrical) Ltd [2020] UKSC 25, [2021] 1 All ER 697, [2021] 1 All ER (Comm) 661.............................2.11.3.1 British & Commonwealth Holdings plc (joint administrators) v Spicer & Oppenheim sub nom British & Commonwealth Holdings plc (No 2), Re [1993] AC 426, [1992] 3 WLR 853, [1992] 4 All ER 876...............................................................3.8.3.2 British American Nickel Corpn Ltd v MJ O’Brien Ltd [1927] AC 369.........................11.3.2.5 British Eagle International Air Lines v Compagnie Nationale Air France [1975] 1 WLR 758, [1975] 2 All ER 390, [1975] 2 Lloyd’s Rep 43................2.7.3, 2.7.3.2, 2.7.3.3 Brown v City of London Corpn; Re Sobam BV [1996] 1 WLR 1070, [1996] BCC 351, [1996] 1 BCLC 446................................................................................................2.4.5.2 Brumark Investments Ltd, Re sub nom Agnew v Comrs of Inland Revenue [2001] UKPC 28, [2001] 2 AC 710, [2001] 3 WLR 454....................................................2.3.8 Buchler v Talbot [2004] UKHL 9, [2004] 2 AC 298, [2004] 2 WLR 582..............2.1.2, 2.4.3.1 Burnden Holdings (UK) Ltd (in liquidation) v Fielding [2019] EWHC 1566 (Ch), [2019] Bus LR 2878, [2019] 6 WLUK 288.......................................................1.3.4; 5.2.5 Burton & Deakin Ltd, Re [1977] 1 WLR 390, [1977] 1 All ER 631, (1977) 121 SJ 169..........................................................................................................................5.7.3 C CA & T Developments Ltd, Re; Koon v Bowes [2019] EWHC 3455 (Ch), [2019] 12 WLUK 179..............................................................................................................4.11.7 CKE Engineering Ltd (in administration), Re [2007] BCC 975....................................10.5.2.3 CR & RA Eade LLP see McTear v Eade Cabvision Ltd v Feetum see Feetum v Levy Cambridge Gas Transportation Corpn v Official Committee of Unsecured Creditors of Navigator Holdings plc [2006] UKPC 26, [2007] 1 AC 508, [2006] 3 All ER 829..........................................................................................................................12.5 Cape plc, Re [2006] EWHC 1316 (Ch), [2006] 3 All ER 1222, [2007] Bus LR 109.....8.3.3.2 Carr v British International Helicopters [1993] BCC 855, [1994] 2 BCLC 474, [1994] ICR 18.....................................................................................................................10.3.2.4 Carraway Guildford (Nominee A) Ltd v Regis UK Ltd [2021] EWHC 1294 (Ch), [2021] 5 WLUK 182, [2022] 1 BCLC 709..................................................8.2.6.2, 8.2.6.3 Cases of Taff’s Wells Ltd, Re [1992] Ch 179, [1991] 3 WLR 731, [1992] BCLC 11....3.5.4 Cash Generator Ltd v Fortune [2018] EWHC 674 (Ch), [2018] 4 All ER 325, [2018] 3 WLUK 694...........................................................................................................3.3.3.2 Castle Trust Direct plc, Re [2020] EWHC 969 (Ch), [2020] 4 WLUK 63, [2021] BCC 1..............................................................................................................................8.3.6.3 Ceart Risk Services Ltd, Re [2012] EWHC 1178 (Ch), [2013] Bus LR 116, [2012] BCC 592.................................................................................................................4.3.4.2 Celtic Extraction Ltd (in liquidation), Re sub nom Bluestone Chemicals Ltd v Environment Agency [2001] Ch 475, [2000] 2 WLR 991, [1999] 4 All ER 684...3.6.1.2 Changtel Solutions UK Ltd [2022] EWHC 694 (Ch), [2022] 3 WLUK 541, [2022] BPUR 926 ..............................................................................................................5.7.3 Charnley Davies Ltd (No 2), Re [1990] BCC 605, [1990] BCLC 760...........................4.7.1 Chesterton International Group plc v Deka Immobilien Inv GmbH [2005] EWHC 656 (Ch), [2005] BPIR 1103..........................................................................................9.5.1 Cheyne Finance plc (in receivership), Re [2007] EWHC 2402 (Ch), [2008] 2 All ER 987, [2008] BCC 182..............................................................................................1.3.3 Chittenden v Pepper [2006] EWHC 1511 (Ch), [2007] BCC 195, [2006] BPIR 1230..8.2.4.2 Christophorous 3 Ltd, Re [2014] EWHC 1162 (Ch)................................4.3.1, 4.12.8; 11.7.2.1 Ci4Net.com Inc, Re [2004] EWHC 1941 (Ch), [2005] BCC 277..................................4.3.6.5 City Logistics Ltd, Re [2002] 2 BCLC 103....................................................................4.4.3 Clark v Clark Construction Initiatives Ltd [2009] BCC 665, [2008] ICR 635, [2008] IRLR 364................................................................................................................10.3.3.4

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Table of Cases Clayton’s Case see Devaynes v Noble Clough Mill Ltd v Martin [1985] 1 WLR 111, [1984] 3 All ER 982, (1985) 82 LSG 1075.10.5.2.1 Clydesdale Financial Services Ltd v Smailes [2009] EWHC 1745 (Ch), [2009] BCC 810, [2010] BPIR 62...............................................................................................4.10.5 Codere Finance (UK) Ltd [2015] EWHC 3778 (Ch), [2015] 12 WLUK 612................12.6.5.2 Codere Finance 2 (UK) Ltd, Re [2020] EWHC 2441 (Ch), [2020] 9 WLUK 129, [2021] 2 BCLC 396................................................................................................8.3.3.1 Collins & Aikman Europe SA, Re [2006] EWHC 1343 (Ch), [2006] BCC 861, [2007] 1 BCLC 182............................................................................................................4.8.2 ColourOz Investment 2 LLC [2020] EWHC 1864 (Ch), [2020] 7 WLUK 172, [2020] BCC 926 ................................................................................................................8.3.2.3 Company (No 006685 of 1996), Re [1997] BCC 830, [1997] 1 BCLC 639..................3.4.3.2 Company (No 00751 of 1993), ex p Avocet Aviation Ltd, Re [1992] BCLC 869..........3.4.3.2 Condon, ex p James, Re (1873–4) LR 9 Ch App 609, [1874–80] All ER Rep 388...3.7.3; 4.7.1 Coniston Hotel (Kent) LLP (in liquidation), Re [2013] EWHC 93 (Ch), [2013] 2 WLUK 43, [2015] BCC 1...............................................................................4.7.2.1; 7.7.1 Contex Drouzhba Ltd v Wiseman [2007] EWCA Civ 1201, [2008] BCC 301, [2008] 1 BCLC 631............................................................................................................6.4.3.1 Cornercare Ltd, Re [2010] EWHC 893 (Ch), [2010] BCC 592.....................................4.3.4.3 Cornhill Insurance plc v Improvement Services Ltd [1986] 1 WLR 114, (1986) 2 BCC 98942, [1986] PCC 204..........................................................................................1.3.3 Cortefiel SA, Re [2012] EWHC 2998 (Ch)....................................................................8.3.3.2 Cosslett (Contractors) Ltd (in administration) (No 2), Re see Smith (administrator of Cosslett (Contractors) Ltd) v Bridgend County Borough Council Countrywide plc, Re [2009] EWHC 1347 (Ch)..............................................................8.3.1.3 Courts plc (in liquidation), Re [2008] EWHC 2339 (Ch), [2009] 1 WLR 1499, [2008] BCC 917.................................................................................................................2.6.3 Coyne v DRC Distribution Ltd & Foster [2008] EWCA Civ 488, [2008] BCC 612, [2008] BPIR 1247...................................................................................................4.11.7 Croftbell Ltd, Re [1990] BCC 781, [1990] BCLC 844..................................................9.3.1.1 Crystal Palace FC 2000 Ltd v Kavanagh [2013] EWCA Civ 1410, [2014] 1 All ER 1033, [2014] BCC 664............................................................................................10.3.5.1 Cuckmere Brick Co v Mutual Finance [1971] Ch 949, [1971] 2 WLR 1207, [1971] 2 All ER 633..............................................................................................................9.2.1.3 Cukurova Finance International Ltd v Alfa Telecom Turkey Ltd [2009] UKPC 19, [2009] 3 All ER 849, [2010] 1 All ER (Comm) 1173.............................................9.10.2.1 Currie v Consolidated Kent Collieries Corpn [1906] 1 KB 134.....................................3.5.4 D D & D Wines International Ltd (in liquidation), Re [2016] UKSC 47, [2016] 1 WLR 3179, [2017] 1 All ER 773......................................................................................2.2. DKLL Solicitors v HMRC [2007] EWHC 2067 (Ch), [2007] BCC 908, [2008] 1 BCLC 112 ....................................................................................................4.6.5.9, 4.12.8 DTEK Energy BV, Re [2021] EWHC 1551 (Ch), [2021] 6 WLUK 69, [2022] 1 BCLC 260..........................................................................................................................12.6.5.2 Dallhold Estates (UK) Pty Ltd, Re [1992] BCC 394, [1992] BCLC 621, [1992] EG 18 (CS) ........................................................................................................................12.4 Danka Business Systems plc (in liquidation), Re [2013] EWCA Civ 92, [2013] Ch 506, [2013] 2 WLR 1398........................................................................................3.12.1 Davey v Money [2018] EWHC 766 (Ch), [2018] Bus LR 1903, [2018] 4 WLUK 86 ......4.2.1, 4.7.1; 9.7.2.2 Debenhams Retail Ltd (in administration), Re [2020] EWHC 921 (Ch), [2020] 3 All ER 319, [2020] 2 All ER (Comm) 409; aff’d [2020] EWCA Civ 600, [2020] 3 All ER 319, [2020] 2 All ER (Comm) 409...................................................4.5.3; 10.3.4.1 Debenhams Retail Ltd, Re; New Look Retailers Ltd & Discovery (Northampton) Ltd v Debenhams Retail Ltd [2019] EWHC 2303 (Ch), [2019] 7 WLUK 347.............8.2.6.2, 8.2.6.3

xxiv

Table of Cases Debtor (No 140 IO of 1995), Re sub nom Greystoke, Hamilton-Smith, Re [1996] 2 BCLC 429, [1997] BPIR 24...................................................................................8.2.2.2 Debtor (No 259 of 1990), Re [1992] 1 WLR 226, [1992] 1 All ER 641........................8.2.6.3 DeepOcean 1 UK Ltd, Re [2020] EWHC 3549 (Ch), [2021] Bus LR 632, [2020] 12 WLUK 335...................................................................................................8.3.1.4, 8.3.7.6 Dee Valley Group plc [2017] EWHC 184 (Ch), [2017] 3 WLR 767, [2017] 2 BCLC 328 ..............................................................................................................8.3.6.1, 8.3.7.3 Demite Ltd v Protex Health Ltd [1998] BCC 638..........................................................9.8.2 Denney v John Hudson & Co Ltd [1992] BCC 503, [1992] BCLC 901........................5.7.3 Destone Fabrics, Re [1941] Ch 319................................................................................5.6.2 Devaynes v Noble sub nom Clayton’s Case (1816) 1 Mer 529, 35 ER 767 ..................5.6.2 D’Jan of London Ltd, Re [1993] BCC 646, [1994] 1 BCLC 561..................................6.4.4 Dollar Land Holdings, Re [1993] BCC 823, [1994] 1 BCLC 404............................1.3.4; 3.4.2 Doltable Ltd v Lexi Holdings plc [2005] EWHC 1804 (Ch), [2006] BCC 918, [2006] 1 BCLC 384............................................................................................................4.3.6.5 Domestic & General Insulation Ltd, Re [2018] EWHC 265 (Ch), [2018] Bus LR 923, [2018] 2 WLUK 336...............................................................................................3.3.1 Dornoch Ltd v Westminster International BV [2009] EWHC 1782 (Admlty), [2009] 2 Lloyd’s Rep 420, [2009] 2 CLC 226......................................................................5.4.2 Drax Holdings Ltd, Re [2003] EWHC 2743 (Ch), [2004] 1 WLR 1049, [2004] 1 All ER 903 ...................................................................................................................12.6.5.1 Dry Docks Corpn of London, Re (1888) 39 Ch D 306...................................................3.4.5 E ESS Production Ltd (in administration) v Sully [2005] EWCA Civ 554, [2005] BCC 435, [2005] BCLC 547...........................................................................................6.4.5.2 Eco Link Resources Ltd, Re [2012] BCC 731................................................................4.3.5.2 Edengate Homes (Butley Hall) Ltd (in liquidation), Re [2022] EWCA Civ 626, [2022] 5 WLUK 79, [2022] BCC 940................................................................................3.9.3 Edennote Ltd, Re see Tottenham Hotspur v Ryman Embassy Art Products Ltd, Re (1987) 3 BCC 292, [1988] BCLC 1, [1987] PCC 389..3.8.3.2 English Joint Stock Bank, ex p Harding, Re (1866–67) LR 3 Eq 341............................10.3.2.1 English, Scottish & Australian Chartered Bank, Re [1893] 3 Ch 385............................8.3.7.4 Eurofood IFSC Ltd, Re (Case C-341/04) [2006] Ch 508, [2006] 3 WLR 309, [2006] All ER (EC) 1078....................................................................................................12.2.4.2 Eurofood IFSC Ltd (No 1), Re [2004] 3 WLUK 640, [2004] BCC 383........................12.2.4.2 Euromaster Ltd, Re [2012] EWHC 2356 (Ch), [2012] BCC 754...................................4.3.4.4 Euromex Ventures Ltd v BNP Paribas Real Estate Advisory & Property Management UK Ltd [2013] EWHC 3007 (Ch)..........................................................................10.5.4 Evans v Jones [2016] EWCA Civ 660, [2017] Ch 1, [2016] 3 WLR 1480....................1.3.4 Exeter City Council v Bairstow sub nom Trident Fashions Ltd, Re [2007] EWHC 400 (Ch), [2007] 4 All ER 437, [2007] BCC 236..........................................................2.4.4.2 Express Electrical Distributors Ltd v Beavis [2016] EWCA Civ 765, [2016] 1 WLR 4783, [2016] BCC 566............................................................................................5.7.3 F F2G Realisations Ltd (in liquidation), Re see Gray v G-T-P Group Ltd Fairway Magazines, Re [1992] BCC 924, [1993] BCLC 643...................................5.3.3, 5.6.2 Farrar v Farrars Ltd (1888) 40 Ch D 395........................................................................9.2.2 Feetum v Levy sub nom Cabvision Ltd v Feetum [2005] EWCA Civ 1601, [2006] Ch 585, [2006] BCC 340..............................................................................................9.3.2.2 Felixstowe Dock & Rly Co v United States Lines Inc [1989] QB 360, [1989] 2 WLR 109, [1988] 2 All ER 77..........................................................................................12.5 Ferrotech Ltd & Granville Technology Group, Re see Re Huddersfield Fine Worsteds Ltd Fibria Cellulose S/A v Pan Ocean Co Ltd [2014] EWHC 2124 (Ch), [2014] Bus LR 1041........................................................................................................................12.3 Fieldfisher v Pennyfeathers [2016] EWHC 566 (Ch), [2016] BCC 697........................4.3.6.2

xxv

Table of Cases Financial Conduct Authority v Carillion plc (in liquidation) [2021] EWHC 2871 (Ch), [2022] Ch 162, [2022] 2 WLR 367.........................................................................3.5.4 Finnerty v Clark see Re St George’s Property Services (London) Ltd (in administration) Folgate London Market Ltd (formerly Towergate Stafford Knight Co Ltd) v Chaucer Insurance plc see Mayhew v King Fore Fitness Investments Holdings Ltd, Re see Hashmi v Lorimer-Wing Fortuna Fix Ltd (in administration), Re [2020] EWHC 2369 (Ch), [2020] 9 WLUK 30  4.6.5.9, 4.10.5 Fowler v Commercial Timber Co Ltd [1930] 2 KB 1.....................................................10.3.2.1 Frankice (Golders Green) Ltd (in administration), Re [2010] EWHC 1229 (Ch), [2010] Bus LR 1608........................................................................................4.4.1.2, 4.4.3 Fraser v Oystertec plc [2003] EWHC 2787 (Pat), [2004] BCC 233, [2004] BPIR 486  2.7.3.1, 2.7.3.3 Fraser Turner Ltd v PricewaterhouseCoopers LLP [2019] EWCA Civ 1290, [2019] 7 WLUK 303..............................................................................................................4.7.2.2 Freevale Ltd v Metrostore Holdings Ltd [1984] Ch 199, [1984] 2 WLR 496, [1984] 1 All ER 495..............................................................................................................9.5.3 Frontsouth (Witham) Ltd (in administration), Re [2011] EWHC 1668 (Ch), [2011] BCC 635, [2012] 1 BCLC 818...............................................................................4.3.4.5 G GHE Realisations Ltd (formerly Gatehouse Estates Ltd), Re [2005] EWHC 2400 (Ch), [2006] 1 WLR 287, [2006] 1 All ER 357......................................................4.11.4 GHSP Inc v AB Electronic Ltd [2010] EWHC 1828 (Comm), [2011] 1 Lloyd’s Rep 432, [2010] CILL 2915...........................................................................................10.5.2.2 Gategroup Guarantee Ltd, Re [2021] EWHC 304 (Ch), [2021] 2 WLUK 252, [2021] BCC 549 ......................................................................8.3.1.4, 8.3.1.5; 10.3.3.2; 12.6.5.2 Gatnom Capital & Finance Ltd [2010] EWHC 3353 (Ch), [2011] BPIR 1013.............8.2.6.3 General Rolling Stock Co, Re (Chapman’s Case) (1865–66) LR 1 Eq 346...................10.3.2.1 Globespan Airways Ltd (in liquidation), Re [2012] EWCA Civ 1159, [2012] 4 All ER 1124, (2012) 109 (33) LSG 18................................................................................4.11.3 Gold Fields Mining LLC v Tucker [2009] EWCA Civ 173, [2010] BCC 544, [2009] 1 BCLC 567............................................................................................................8.2.6.1 Gordon & Breach Science Publishers Ltd, Re [1995] BCC 261, [1995] 2 BCLC 189..3.3.4 Gosling v Gaskell [1897] AC 575...................................................................................9.4.3 Gough’s Garages Ltd v Pugsley [1930] 1 KB 615.........................................................9.4.3 Gould v Advent Computer Training Ltd sub nom Advent Computer Training Ltd, Re [2010] EWHC 459 (Ch), [2011] BCC 44...............................................................4.6.3 Government of India v Taylor [1955] AC 491, [1955] 2 WLR 303, [1955] 1 All ER 292..........................................................................................................................3.10.3 Granada UK Rental & Retail Ltd v Pensions Regulator [2019] EWCA Civ 1032, [2019] 6 WLUK 313, [2020] ICR 747....................................................................11.8.2.4 Gray v G-T-P Group Ltd sub nom F2G Realisations Ltd (in liquidation), Re [2010] EWHC 1772 (Ch), [2011] BCC 869, [2011] 1 BCLC 313.....................................9.10.1 Gray’s Inn Construction Co Ltd, Re [1980] 1 WLR 711, [1980] 1 All ER 814, (1980) 124 SJ 463....................................................................................................5.7.4.2, 5.7.4.4 Green v Gigi Brooks Ltd [2015] EWHC 961 (Ch).........................................................4.3.6.5 Greystoke, Hamilton-Smith, Re see Re Debtor (No 140 IO of 1995) Griffiths v Secretary of State for Social Services [1974] QB 468, [1973] 3 WLR 831, [1973] 3 All ER 1184..............................................................................................10.3.2.1 Guardian Assurance Co, Re [1917] 1 Ch 431.................................................................8.3.1.2 H HIH Casualty & General Insurance Ltd, Re sub nom McGrath v Riddell [2008] UKHL 21, [2008] 1 WLR 852, [2008] BCC 349........................................................2.7.3.2; 12.4 HHY Luxembourg Sarl v Barclays Bank plc [2010] EWCA Civ 1248, [2011] 1 BCLC 336 .........................................................................................................................11.7.2.1

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Table of Cases HLC Environmental Projects Ltd (in liquidation), Re [2013] EWHC 2876 (Ch), [2014] BCC 337 .....................................................................................................1.3.4 HMRC v Football League [2012] EWHC 1372 (Ch), [2012] Bus LR 1539, [2013] BCC 60 .......................................................................................................2.7.3.1, 2.7.3.3 HMRC v Maxwell [2010] EWCA Civ 1379, [2011] Bus LR 707, [2012] BCC 30........3.3.3.6; 4.6.5.5 HMRC v Portsmouth City Football Club Ltd (in administration) [2010] EWHC 2013 (Ch), [2011] BCC 149, [2010] BPIR 1123..................................................8.2.3.2, 8.2.4.2 HMRC v Rochdale Drinks Distributors Ltd [2011] EWCA (Civ) 1116, [2012] STC 186, [2012] 1 BCLC 748........................................................................................3.4.5 Hague v Nam Tai Electronics [2008] UKPC 13, [2008] BCC 295, [2008] BPIR 363...3.7.4 Haine v Day [2008] EWCA Civ 626, [2008] BCC 845, [2008] 2 BCLC 517...............3.10.2 Halesowen Presswork & Assemblies Ltd, Re [1972] AC 785, [1972] 2 WLR 455, [1972] 1 All ER 641................................................................................................2.11.3.1 Hammonds (a firm) v Pro-fit USA Ltd [2007] EWHC 1998 (Ch), [2008] 2 BCLC 159, (2007) 104 (35) LSG 38...............................................................................4.3.6.2, 4.3.6.5 Hampshire v The Board of the Pension Protection Fund (Case C-17/17) [2018] 9 WLUK 41, [2019] ICR 327, [2018] IRLR 1128....................................................10.4.2.2 Hans Brochier Holdings Ltd v Exner [2006] EWHC 2594 (Ch), [2007] BCC 127.......12.2.4.3 Harrison, ex p Jay, Re (1880) LR 14 ChD 19.................................................................2.7.3.1 Hashmi v Lorimer-Wing [2022] EWHC 191 (Ch), [2022] 2 WLUK 427, [2022] BCC 687..........................................................................................................................4.3.4.5 Hat & Mitre plc (in administration), Re [2020] EWHC 2649 (Ch), [2020] 10 WLUK 91............................................................................................................................1.3.3 Hawk Insurance Co Ltd, Re [2001] EWCA Civ 241, [2002] BCC 300, [2001] 2 BCLC 480 ..............................................................................................................8.3.3.1, 8.3.3.2 Hawkes Hill Publishing Co Ltd (in liquidation), Re [2007] BCC 937, [2007] BPIR 1305, (2007) 151 SJLB 743....................................................................................6.5.1 Hellas Telecommunications (Luxembourg) II SCA, Re [2009] EWHC 3199 (Ch), [2010] BCC 295 .........................................................................................4.12.8; 12.2.4.3 Hellas Telecommunications (Luxembourg) II SCA (in administration), Re [2011] EWHC 3176 (Ch)............................................................................................3.8.3; 4.11.6 Hendy Lennox (Industrial Engines) Ltd v Grahame Puttick Ltd [1984] 1 WLR 485, [1984] 2 All ER 152, [1984] 2 Lloyd’s Rep 422.....................................................10.5.2.3 Highberry Ltd v Colt Telecom Group plc (No 2) [2002] EWHC 2815 (Ch), [2003] BPIR 324.................................................................................................................4.3.6.5 High Street Rooftop Holdings Ltd, Re [2020] EWHC 2572 (Ch), [2020] Bus LR 2127, [2020] 9 WLUK 329.....................................................................................4.3.6.6 Hill v Spread Trustee Co Ltd [2006] EWCA Civ 542, [2007] 1 WLR 2404, [2006] BCC 646 ................................................................................................................5.2.5 Hindcastle Ltd v Barbara Attenborough Associates Ltd [1997] AC 70, [1996] 2 WLR 262, [1996] 1 All ER 737........................................................................................3.6.2 Holland v HMRC [2010] UKSC 51, [2010] 1 WLR 2793, [2011] 1 All ER 430.....6.2.2, 6.4.4 Hollicourt (Contracts) Ltd (in liquidation) v Bank of Ireland [2001] Ch 555, [2001] 2 WLR 290, [2001] 1 All ER 289...................................................................5.7.4.3, 5.7.4.4 Houst Ltd, Re [2022] EWHC 1941 (Ch), [2022] 7 WLUK 303..........................8.3.1.6, 8.3.3.3 Huddersfield Fine Worsteds Ltd, Re sub nom Ferrotech Ltd & Granville Technology Group, Re [2005] EWHC 1848 (Ch), [2005] BCC 915.........................................10.3.4.1 Hughes v Hannover-Rucksversicherungs AG [1997] BCC 921, [1997] 1 BCLC 497, [1999] BPIR 224.....................................................................................................12.4 Hurricane Energy plc, Re [2021] EWHC 1759 (Ch), [2021] 6 WLUK 382, [2021] BCC 989.................................................................................................................8.3.7.7 Hydroserve Ltd, Re [2007] EWHC 3026 (Ch), [2008] BCC 175..................................2.6.3 I ILG Travel Ltd (in administration), Re [1996] BCC 21, [1995] 2 BCLC 128...............2.11.3.1 IRC v Adam & Partners Ltd [2002] BCC 247, [2001] 1 BCLC 222, [2000] BPIR 986... 8.2.1

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Table of Cases IRC v Wimbledon FC Ltd [2004] EWCA Civ 655, [2004] BCC 638, [2005] 1 BCC 66 ................................................................................................................8.2.3.2, 8.2.4.5 Illingworth v Houldsworth see Re Yorkshire Woolcombers Association Ltd Indah Kiat International Finance Co BV, Re [2016] EWHC 246 (Ch), [2016] BCC 418..........................................................................................................................12.6.5.2 Innovate Logistics Ltd (in administration) v Sunberry Properties Ltd [2008] EWCA Civ 132, [2009] BCC 164, [2009] 1 BCLC 145.....................................................10.2.3.3 Instant Access Properties Ltd (in liquidation) v Rosser [2018] EWHC 756 (Ch), [2018] 4 WLUK 156, [2018] BCC 751..................................................................6.2.3 Instant Cash Loans Ltd, Re [2019] EWHC 2795 (Ch), [2019] 10 WLUK 97.....8.3.1.2, 8.3.7.3 Interedil Srl (in liquidation) v Fallimento Interedil Srl (Case C-396/09) [2012] Bus LR 1582, [2012] BCC 851, [2011] BPIR 1639............................................................12.2.4.2 International Air Transport Association v Ansett Australia Holdings Ltd [2008] 1 WLR 758 ................................................................................................................2.7.3.2 International Sections Ltd (in liquidation), Re [2009] EWHC 137 (Ch), [2009] BCC 574, [2009] 1 BCLC 580........................................................................................2.6.3 Investin Quay House Ltd, Re [2021] EWHC 2371 (Ch), [2021] 8 WLUK 170, [2022] BCC 497.................................................................................................................12.2.4.2 Isovel Contracts Ltd (in administration) v ABB Building Technologies Ltd (formerly ABB Steward Ltd) [2002] 1 BCLC 390, [2002] BPIR 525....................................2.11.5 Ivey v Genting Casinos (UK) Ltd (t/a Crockfords Club) [2017] UKSC 67, [2018] AC 391, [2017] 3 WLR 1212........................................................................................6.4.3.2 J J Smiths Haulage Ltd, Re [2007] BCC 135....................................................................4.5.1 JCAM Commercial Real Estate Property XV Ltd v Davis Haulage Ltd [2017] EWCA Civ 267, [2017] BCC 222.......................................................................................4.3.4.3 JD Group Ltd, Re [2022] EWHC 202 (Ch), [2022] 2 WLUK 35...................................6.4.3.2 JSC BTA Bank v Ablyazov [2018] EWCA Civ 1176, [2018] 5 WLUK 404, [2019] BCC 96...................................................................................................................5.4.3 JT Frith Ltd, Re [2012] EWHC 196 (Ch), [2012] BCC 634..........................................2.6.2 Jeavons, ex p Mackay, Re (1872–73) LR 8 Ch App 643................................................2.7.3.1 Jervis v Pillar Denton Ltd [2014] EWCA Civ 180, [2015] Ch 87, [2014] 3 WLR 901  2.4.4.2; 10.2.3.2 Jetivia SA v Bilta (UK) Ltd [2015] UKSC 23, [2016] AC 1, [2015] 2 WLR 1168........6.4.3.2 Johnson v Arden [2018] EWHC 1624 (Ch), [2018] 6 WLUK 610, [2019] 2 BCLC 215..........................................................................................................................5.2.6 Johnson v Davies [1999] Ch 117, [1998] 3 WLR 1299, [1998] 2 BCLC 252...............8.2.5.3 Johnson Machine & Tool Co Ltd, Re [2010] EWHC 582 (Ch), [2010] BCC 382, (2010) 160 NLJ 805................................................................................................4.12.9 Joint Administrators of Castlebridge Plant Ltd, Re [2015] CSOH 165, [2017] BCC 87, 2016 GWD 1-17......................................................................................................2.6.3 Joshua Shaw & Sons Ltd, Re (1989) 5 BCC 188, [1989] BCLC 362............................3.10.3 K Kapoor v National Westminster Bank plc [2011] EWCA Civ 1083, [2012] 1 All ER 1201, [2011] BPIR 1680.........................................................................................8.2.6.3 Karnos Property Co Ltd, Re (1989) 5 BCC 14, [1989] BCLC 340, 87 LGR 263..........3.4.3.2 Kaupthing Capital Partners II Master LP Inc, Re [2010] EWHC 836 (Ch), [2011] BCC 338 ................................................................................................................12.2 Kaupthing Singer & Friedlander Ltd (in administration), Re [2010] EWCA Civ 518, [2010] Bus LR 1500, [2011] BCC 555...................................................................2.11.4 Kayford Ltd (in liquidation), Re [1975] 1 WLR 279, [1975] 1 All ER 604, (1974) 118 SJ 752 .....................................................................................................................6.5.4 Kayley v Vending Ltd [2009] EWHC 904 (Ch), [2009] BCC 578, [2011] 1 BCC 114 ...4.12.9, 4.12.6 Kelly v Inflexion Fund 2 Ltd see Re PAL SC Realisations 2007 Ltd (in liquidation)

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Table of Cases Key2Law (Surrey) LLP v De’Antiquis [2011] EWCA Civ 1567, [2012] BCC 375, [2012] 2 BCLC 195................................................................................................10.3.5.2 Keypack Homecare Ltd (No 1), Re (1987) 3 BCC 558, [1987] BCLC 409, [1988] PCC 115 .................................................................................................................3.9.4 Klempka v Miller see Re Parkside International Ltd (in administration) Knight v Lawrence [1991] BCC 411, [1993] BCLC 215, [1991] 1 EG 105..................9.7.2.4 Kumar v Secretary of State for Business, Energy & Industrial Strategy [2021] EWHC 2965 (Ch), [2021] 11 WLUK 192, [2022] BCC 309..............................................3.13.2 L L v M Ltd [2006] EWHC 3395 (Ch), [2007] Pens LR 11..............................................11.8.5.2 LF2 Ltd v Supperstone [2018] EWHC 1776 (Ch), [2018] Bus LR 2303, [2018] 7 WLUK 218..............................................................................................................4.8.6 Lacontha Foundation v GBI Investments Ltd [2010] EWHC 37 (Ch), [2010] 2 CLC 624, [2010] BPIR 356.............................................................................................3.4.3.2 Land Rover Group Ltd v UPF (UK) Ltd (in administrative receivership) [2002] EWHC 3183 (QB), [2003] 2 BCLC 222................................................................9.5.3 Langreen Ltd (in liquidation), Re (unreported, 21 October 2011).................................6.5.1 Lazari GP Ltd v Jervis [2012] EWHC 1466 (Ch)...........................................................10.2.3.3 Lazari Properties 2 Ltd v New Look Retailers Ltd [2021] EWHC 1209 (Ch), [2021] Bus LR 915, [2021] 6 WLUK 76............................................................................8.2.6.4 Ledingham-Smith (a bankrupt), Re [1993] BCLC 635..................................................5.3.3 Leeds United Association Football Club Ltd, Re [2007] EWHC 1761 (Ch), [2007] Bus LR 1560, [2008] BCC 11................................................................................10.3.4.1 Lehman Brothers Australia Ltd (in liquidation) v MacNamara [2020] EWCA Civ 321, [2021] Ch 1, [2020] 3 WLR 147.............................................................................4.7.2.3 Lehman Brothers International (Europe) (in administration), Re [2008] EWHC 2869 (Ch), [2009] BCC 632, [2009] 1 BCLC 161................................................4.7.2.1, 4.10.4 Lehman Brothers International (Europe) (in administration), Re [2009] EWCA Civ 1161, [2010] Bus LR 489, [2010] BCC 272................................................8.3.1.2, 8.3.1.5 Lehman Brothers International (Europe) (in administration), Re [2012] EWHC 2997 (Ch), [2014] 2 BCLC 295.......................................................................................9.10.1 Lehman Brothers International (Europe) (in administration), Re [2017] UKSC 38, [2017] 2 WLR 1497, [2017] BCC 235...................................................................2.8, 2.9 Lehman Brothers International (Europe) (in administration), Re [2018] EWHC 1980 (Ch), [2019] Bus LR 1012, [2018] 7 WLUK 667...................................................8.3.1.2 Lehman Brothers International (Europe) (in administration), Re [2020] EWHC 1932 (Ch), [2020] Bus LR 1875, [2020] 7 WLUK 208...................................................4.8.2 Linda Marie Ltd (in liquidation), Re (1988) 4 BCC 463................................................2.4.3.2 Lindsay v O’Loughnane [2010] EWHC 529 (QB), [2012] BCC 153............................6.4.3.1 Lloyds Bank SF Nominees v Aladdin Ltd (in liquidation) [1996] 1 BCLC 720............3.6.4 Lomas v JFB Firth Rixson Inc [2012] EWCA Civ 419, [2012] 2 All ER (Comm) 1076, [2012] 2 Lloyd’s Rep 548.......................................................................................2.7.3.1 Lombard Natwest Factors Ltd v Koutrouzas [2002] EWHC 1084 (QB), [2003] BPIR 444 .........................................................................................................................8.2.5.3 Lomax Leisure Ltd (in liquidation) v Miller [2008] EWCA Civ 525, [2008] BCC 686.. 3.11.2 London Wine Co (Shippers), Re [1986] PCC 121..........................................................10.5.2.3 Longmeade Ltd (in administration), Re [2016] EWHC 356 (Ch), [2017] 2 All ER 244, [2016] Bus LR 506..................................................................................................3.8.1 Lord (liquidator of Rosshill Properties Ltd) v Sinai Securities Ltd [2004] EWHC 1764 (Ch), [2004] BCC 986, [2005] 1 BCLC 295..........................................................5.2.3 Lundy Granite Co, Re (1870–71) LR 6 Ch App 462......................................................2.4.3.2 M MC Bacon Ltd (No 1), Re [1990] BCC 78, [1990] BCLC 324.................................5.2.5, 5.3.3 MK Airlines Ltd (in liquidation), Re [2012] EWHC 2764 Ch, [2013] Bus LR 243, [2012] All ER (D) 142 (May)..................................................................10.2.3.2, 10.2.4.2

xxix

Table of Cases MK Airlines Ltd (in liquidation), Re [2018] EWHC 540 (Ch), [2018] 3 WLUK 390, [2019] BCC 48........................................................................................................2.4.3.2 MTI Trading Systems Ltd (in administration), Re [1998] BCC 400..............................4.3.6.2 McCarthy & Stone plc, Re [2009] EWHC 1116 (Ch)....................................................8.3.4.2 McCartney v Nortel Networks UK Ltd (in administration) see Re Unite the Union McDonagh v Bank of Scotland plc [2018] EWHC 3262 (Ch), [2019] 4 WLR 12, [2018] 11 WLUK 509.............................................................................................9.7.2.2 McGrath v Riddell see Re HIH Casualty & General Insurance Ltd McKillen v Misland (Cyprus) Investments Ltd [2012] EWHC 521 (Ch)......................6.2.3 McTear v Eade [2019] EWHC 1673 (Ch), [2019] 7 WLUK 269, [2019] BCC 1155....1.5.3 Magyar Telecom BV, Re [2013] EWHC 3800 (Ch), [2014] BCC 448, [2015] 1 BCLC 418 .........................................................................................................................12.6.5.1 Manning v AIG Europe Ltd sub nom SSSL Realisations (2002) Ltd, Re [2004] EWHC 1760 (Ch), [2005] 1 BCLC 1, [2004] BPIR 1334...................................................2.7.3.2 March Estates plc v Gunmark [1996] 2 BCLC 1, [1996] BPIR 439, [1996] 2 EGLR 38 ...................................................................................................................8.2.1, 8.2.5.3 Marconi Corpn plc v Marconi plc[2003] EWHC 663 (Ch)............................................8.3.3.1 Marini Ltd (liquidator of) v Dickenson [2004] EWHC 334 (Ch), [2004] BCC 172......6.4.4 Mayhew v King sub nom Folgate London Market Ltd (formerly Towergate Stafford Knight Co Ltd) v Chaucer Insurance plc [2011] EWCA Civ 328, [2011] Bus LR 1327, [2011] BCC 675............................................................................................2.7.3.1 Meadrealm Ltd v Transcontinental Golf Construction (unreported, 29 November 1991).......................................................................................................................9.3.1.1 Medforth v Blake [2000] Ch 86, [1999] 3 WLR 922, [1999] BCC 771....9.7.1, 9.7.2.1, 9.7.2.3 Memco Engineering Ltd, Re [1986] Ch 86, [1985] 3 WLR 875, [1985] 3 All ER 267.10.2.4.1 Metinvest BV, Re [2016] EWHC 79 (Ch), [2016] IL Pr 19...........................................8.3.1.9 Metro Nominees (Wandsworth) (No 1) Ltd v Rayment [2008] BCC 40........................10.2.3.3 Michael v Miller [2004] EWCA Civ 282, [2004] 2 EGLR 151, (2004) 148 SLJB 387.9.2.1.3 Midland Counties District Bank Ltd v Attwood [1905] 1 Ch 357..................................10.3.2.1 Minmar (929) Ltd v Khalatschi [2011] EWHC 1159 (Ch), [2011] BCC 485, [2012] 1 BCLC 798...............................................................................................................4.3.4.5 Minor Hotel Group MEA DMCC v Dymant & Harding (as joint monitors of Corbin & King Holdings Ltd) [2022] EWHC 340 (Ch), [2022] Bus LR 908, [2022] 2 WLUK 221 ....................................................................................7.3.4, 7.5.2, 7.6.6, 7.7.1 Mistral Finance (in liquidation), Re [2001] BCC 27......................................................5.3.4 Mond v Hammond Suddards (No 2) [2000] Ch 40, [1999] 3 WLR 697, [2000] BCC 445.5.7.5 Money Markets International Stockbrokers Ltd (in liquidation) v London Stock Exchange Ltd [2002] 1 WLR 1150, [2001] 4 All ER 223, [2001] 2 All ER (Comm) 344............................................................................................................2.7.3.1 Morphitis v Bernasconi [2003] EWCA Civ 289, [2003] Ch 552, [2003] BCC 540.......6.4.3.2 Moss Groundworks Ltd, Re [2019] EWHC 2825 (Ch), [2019] 9 WLUK 471...............4.12.8 Mourant & Co Trustees v Sixty UK Ltd (in administration) [2010] EWHC 1890 (Ch), [2010] BCC 882, [2011] 1 BCLC 383....................................................................8.2.5.3 Myers v Kestrel Acquisitions Ltd [2015] EWHC 916 (Ch), [2016] 1 BCLC 719.............1.3.4; 11.3.2.5 My Travel Group plc, Re [2004] EWCA Civ 1734, [2005] 2 BCLC 123......................8.3.4.2 N NMUL Realisations Ltd (in administration), Re [2021] EWHC 94 (Ch), [2021] 1 WLUK 162, [2021] BCC 45...................................................................................4.3.5.2 NT Gallagher & Son Ltd, Re [2002] EWCA Civ 404, [2002] 1 WLR 2380, [2002] BCC 867.................................................................................................................8.2.3.1 Namco UK Ltd, Re [2003] EWHC 989 (Ch), [2003] 2 BCLC 78, [2003] BPIR 1170..3.4.5 New Cap Reinsurance Corpn Ltd (in liquidation) v Grant [2011] EWCA Civ 971, [2012] Ch 538, [2012] 2 WLR 1095.......................................................................12.5 New Cap Reinsurance Corpn Ltd v HIH Casualty & General Insurance Ltd [2002] EWCA Civ 300, [2002] 2 BCLC 228, [2002] BPIR 809.......................................3.5.4

xxx

Table of Cases New Look Retailers Ltd & Discovery (Northampton) Ltd v Debenhams Retail Ltd see Debenhams Retail Ltd, Re Nielsen Holdings plc, Re [2015] EWHC 2966 (Ch), [2015] 8 WLUK 84.....................8.3.8.2 Noble Group Ltd, Re [2018] EWHC 3092 (Ch), [2018] 11 WLUK 207, [2019] BCC 349..........................................................................................................................8.3.7.4 Noble Vintners Ltd, Re [2019] EWHC 2806 (Ch), [2019] 11 WLUK 5, [2020] BCC 918..........................................................................................................................6.4.7.3 Nordic Trustee ASA v OGX Petroleo e Gas SA [2016] EWHC 25 (Ch), [2017] 2 All ER 217, [2017] 1 All ER (Comm) 910...................................................................12.3 Norman Holding Co Ltd (in liquidation), Re [1991] 1 WLR 10, [1990] 3 All ER 757, [1991] BCC 11........................................................................................................2.11.3.2 Nortel Networks UK Ltd [2016] EWHC 2769 (Ch), [2017] Bus LR 590.................4.8.1, 4.8.2 Nostrum Oil & Gas plc, Re [2022] EWHC 1646 (Ch), [2020] 6 WLUK 709...............8.3.3.1 O OBG Ltd v Allan [2007] UKHL 21, [2008] 1 AC 1, [2007] 2 WLR 920.......................9.3.4 OJSC International Bank of Azerbaihan, Re; Bakhshiyeva v Sberbank of Russia [2018] EWCA Civ 2802, [2019] 2 All ER 713, [2019] 1 All ER (Comm) 597.....12.3 OMP Leisure Ltd, Re [2008] BCC 67............................................................................4.3.4.2 Oceanfill Ltd v Nuffield Health Wellbeing Ltd [2022] EWHC 2178 (Ch), [2022] 8 WLUK 61................................................................................................................10.2.8.3 O’Connell v Rollings [2014] EWCA Civ 639................................................................4.8.3 Office Metro Ltd, Re sub nom Trillium (Nelson) Properties Ltd v Office Metro Ltd [2012] EWHC 1191 (Ch), [2012] BCC 829, [2012] IL Pr 30................................12.2.4.3 Official Receiver v Stern (No 2); Re Westminster Property Management (No 3) [2001] EWCA Civ 1787, [2004] BCC 581, [2002] 1 BCLC 119......................................6.4.7.5 Oldham v Kyrris [2003] EWCA Civ 1506, [2004] BCC 111, [2004] 1 BCLC 305.......4.7.2.2 Olympia & York Canary Wharf Ltd (No 1), Re [1993] BCC 154, [1993] BCLC 453...4.4.1.2 Olympic Airlines SA, Re [2015] UKSC 27, [2015] 1 WLR 2399, [2015] 3 All ER 694..........................................................................................................................12.2.4.3 Oracle (North West) Ltd v Pinnacle Financial Services (UK) Ltd [2008] EWHC 1920 (Ch), [2009] BCC 159.............................................................................................4.3.2 P PAL SC Realisations 2007 Ltd (in liquidation), Re sub nom Kelly v Inflexion Fund 2 Ltd [2010] EWHC 2850 (Ch), [2011] BCC 93.......................................................2.6.2 PJSC Uralkali v Rowley [2020] EWHC 3442 (Ch), [2020] 12 WLUK 201..................4.7.1 PK Airfinance Sarl v Alpstream AG [2015] EWCA Civ 1318, [2016] 1 CLC 135, [2016] 2 P & CR 2..................................................................................................9.2.2 Pagden v Soho Square Capital LLP [2022] EWHC 944 (Ch), [2022] 4 WLUK 179....3.9.4 Pantmaenog Timber Co Ltd, Re [2003] UKHL 49, [2004] 1 AC 158, [2003] 3 WLR 767..........................................................................................................................3.7.2 Park Air Services plc, Re [2000] 2 AC 172, [1999] 2 WLR 396, [1999] 1 All ER 673 ......3.6.4; 10.2.4.4 Parkside International Ltd (in administration), Re sub nom Klempka v Miller [2008] EWHC 3354 (Ch), [2010] BCC 309, [2009] BPIR 549.........................................5.3.2 Peak Hotels & Resorts Ltd (in liquidation), Re [2019] EWCA Civ 345, [2019] Bus LR 1758, [2019] 3 WLUK 126.....................................................................................5.6.2 Permacell Finesse Ltd (in liquidation), Re [2007] EWHC 3233 (Ch), [2008] BCC 208..........................................................................................................................2.6.2 Petropavlovsk plc (in administration), Re [2022] EWHC 2097 (Ch), [2022] 8 WLUK 14............................................................................................................................4.8.1 Phillips (liquidator of AJ Bejhor & Co) v Brewin Dolphin Bell Lawrie Ltd (formerly Brewin Dolphin & Co Ltd) [2001] UKHL 2, [2001] 1 WLR 143, [2001] 1 All ER 673..........................................................................................................................5.2.2 Phoenix Properties Ltd v Wimpole Street Nominees Ltd [1992] BCLC 737, [1989] EG 167 (CS)............................................................................................................9.3.3.3

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Table of Cases Portbase Clothing Ltd, Re [1993] Ch 388, [1993] 3 WLR 14, [1993] 3 All ER 829.....2.5 Powdrill v Watson [1995] 2 AC 394, [1995] 2 WLR 312, [1995] 2 All ER 65....9.5.3; 10.3.2.1 Power v Sharp Investments see Re Shoe Lace Ltd Powertrain Ltd, Re [2015] EWHC 3998 (Ch), [2016] BCC 216, [2017] 1 BCLC 95...3.13.3 Practice Direction (Ch D: Insolvency Proceedings) [2020] 7 WLUK 639, [2020] BCC 698, [2020] BPIR 1211................................................................. 1.2.7; 3.4.4; 4.3.4; 5.7.3 Practice Direction – Order under section 127 Insolvency Act 1986 [2007] BCC 837...5.7.3 Practice Statement (Companies: Schemes of Arrangement under Part 26 & Part 26A of the Companies Act 2006) [2020] 1 WLR 4493, [2020] 6 WLUK 547, [2020] BCC 691 ...........................................................................................1.2.7; 8.3.2.1, 8.3.2.3 Private Equity Insurance Group SIA v Swedbank AS (Case C-156/15) [2017] 1 WLR 1602, [2017] 1 BCLC 207......................................................................................9.10.1 Produce Marketing Consortium Ltd (in liquidation) (No 1), Re [1989] f1 WLR 745, [1989] 3 All ER 1, [1989] BCLC 513.....................................................................6.4.2.3 Produce Marketing Consortium (in liquidation) Ltd (No 2), Re (1989) 5 BCC 569, [1989] BCLC 520...................................................................................................6.4.2.4 Prudential Assurance Co Ltd v PRG Powerhouse Ltd [2007] EWHC 1002 (Ch), [2007] Bus LR 1771, [2007] BCC 500........................................8.2.5.3, 8.2.6.2; 10.2.8.3 Q QRS 1 ApS v Fransden [1999] 1 WLR 2169, [1999] 3 All ER 289, [1999] STC 616...3.10.3 R R v Campbell [1984] BCLC 83......................................................................................6.4.7.2 R & C Comrs v Winnington Networks Ltd [2014] EWHC 1259 (Ch), [2014] BCC 675..........................................................................................................................3.4.5 R (on the application of Cukurova Finance International Ltd) v HM Treasury [2008] EWHC 2567 (Admin), [2009] Eu LR 317..............................................................9.10.1 R (on the application of Palmer) v Northern Derbyshire Magistrates’ Court [2021] EWHC 3013 (Admin), [2021] 11 WLUK 175, [2022] BCC 467...........................10.3.2.5 RA Cripps (Pharmaceutical) & Son Ltd v Wickenden [1973] 1 WLR 944, [1973] 2 All ER 606, (1972) 117 SJ 446.....................................................................................9.3.3.2 Raithatha v Arnold Holstein GmbH [2017] EWHC 3069 (Ch), [2017] 3 WLUK 423......3.9.4; 4.10.5 Ralls Builders Ltd (in liquidation), Re; Grant v Ralls [2016] EWHC 243 (Ch), [2016] Bus LR 555, [2016] BCC 293...........................................................6.4.2.3, 6.4.2.4, 6.5.1 Ramlort v Reid [2004] EWCA Civ 800, [2005] 1 BCLC 331, [2004] BPIR 985.....5.2.2, 5.2.6 Rastelli Davide e C Snc v Hidoux (Case C-191/10) [2012] All ER (EC) 239...............12.2.4.2 Real Estate Development Co, Re [1991] BCLC 210......................................................12.6 Real Meat Co (in receivership), Re [1996] BCC 254.....................................................9.8.2 Redwood Master Fund Ltd v TD Bank Europe [2002] EWHC 2703 (Ch), [2006] 1 BCLC 149 ..............................................................................................................11.3.2.5 Reid v Ramlort Ltd (preliminary issue) see Re Thoars (deceased) Reigate v Union Manufacturing Co (Ramsbottom) Ltd [1918] 1 KB 592.....................10.3.2.1 Ricketts v Ad Valorem Factors Ltd [2003] EWCA Civ 1706, [2004] 1 All ER 894, [2004] BCC 164......................................................................................................6.4.5.2 Ridgeway Motors (Isleworth) Ltd v ALTS Ltd [2005] EWCA Civ 92, [2005] 1 WLR 2871, [2005] BCC 496............................................................................................3.4.3.2 Riverside CREM 3 Ltd v Virgin Active Health Clubs Ltd [2021] EWHC 746 (Ch), [2021] 3 WLUK 663...............................................................................................8.3.1.9 Roberts v Frohlich [2011] EWHC 257 (Ch), [2012] BCC 407, [2011] 2 BCLC 625....6.4.2.1 Rockfon A/S v Specialarbejderforbundet i Danmark [1995] ECR I-4291, [1996] CEC 224, [1996] IRLR 168.............................................................................................10.3.2.3 Rodenstock GmbH, Re [2011] EWHC 1104 (Ch), [2011] Bus LR 1245, [2012] BCC 459 .........................................................................................................................12.6.5.1 Ronelp Marine Ltd v STX Offshore & Shipbuilding Co Ltd [2016] EWHC 2228 (Ch), [2017] BPIR 203.....................................................................................................12.3

xxxii

Table of Cases Rose v AIB Group (UK) plc see Re Tain Construction Ltd Rover Espana, Re [2006] EWHC 3426 (Ch), [2006] BCC 599, [2005] BPIR 1162......4.8.2 Royscot Spa Leasing Ltd v Lovett [1995] BCC 502, [1994] NPC 146..........................5.4.3 Rubber & Produce Investment Trust, Re [1915] 1 Ch 382.............................................3.7.3 Rubin v Eurofinance Sa [2012] UKSC 46, [2013] 1 AC 236, [2012] 3 WLR 1019 ...12.3, 12.4 Rusant Ltd v Traxys Far East Ltd [2013] EWHC 4083 (Comm)...................................3.4.3.2 S SAW (SW) 2010 Ltd v Wilson [2017] EWCA Civ 1001, [2018] Ch 213, [2018] 2 WLR 636 ................................................................................................................4.3.5.2 SB Corporate Solutions Ltd v Prescott sub nom Switch Services Ltd (in administration), Re [2012] Bus LR D91...........................................................................................4.3.6.3 SEA Assets v Perusahaan Perseroan (Persero) PT Perusahaan Penerbangan Garuda Indonesia [2001] EWCA Civ 1696, [2001] 11 WLUK 879...................................8.3.4.1 SSRL Realisations Ltd (in administration), Re [2015] EWHC 2590 (Ch), [2016] 1 P & CR 2....................................................................................................................10.2.3.3 SSSL Realisations (2002) Ltd, Re see Manning v AIG Europe Ltd SSSL Realisations (2002) Ltd (formerly Save Service Stations Ltd) (in liquidation), Re [2006] EWCA Civ 7, [2006] Ch 610, [2006] 2 WLR 1369...................3.6.1.1, 3.6.1.2 St George’s Property Services (London) Ltd (in administration), Re sub nom Finnerty v Clark [2011] EWCA Civ 858, [2012] Bus LR 594, [2011] BCC 702.................4.10.5 Sahaviriya Steel Industries UK Ltd v Hewden Stuart Ltd [2015] EWHC 2726 (Ch), [2016] BCC 450......................................................................................................5.7.3 Salford Estates (No 2) Ltd v Altomart Ltd [2014] EWCA Civ 1575, [2015] Ch 589, [2015] 3 WLR 491..................................................................................................3.4.3.2 Salvage Association, Re [2003] EWHC 1028 (Ch), [2004] 1 WLR 174, [2003] BCC 504..........................................................................................................................1.5.4 Sandhu (t/a Isher Fashions UK) v Jet Star Retail Ltd (in administration) [2011] EWCA Civ 459....................................................................................................................10.5.3 Sands v Clitheroe [2006] BPIR 1000..............................................................................5.4.2 Savoy Hotel Ltd, Re [1981] Ch 351, [1981] 3 WLR 441, [1981] 3 All ER 646............8.3.1.3 Schmitt v Deichmann [2012] EWHC 62 (Ch), [2013] Ch 61, [2012] 3 WLR 681........12.5 Secretary of State for Business, Energy & Industrial Strategy v Geoghegan [2021] EWHC 672 (Ch), [2022] 1 All ER (Comm) 815, [2021] Bus LR 776...................1.5.3 Secretary of State for Business Innovation & Skills v Cathie [2012] EWCA Civ 739, [2012] BCC 813......................................................................................................6.4.7.5 Secretary of State for Trade & Industry v Bottrill [2000] 1 All ER 915, [1999] BCC 177, [1999] ICR 592...............................................................................................10.3.3.4 Secretary of State for Trade & Industry v Deverell [2001] Ch 340, [2000] 2 WLR 907, [2000] 2 All ER 365................................................................................................6.2.3 Secretary of State for Trade & Industry v Frid [2004] UKHL 24, [2004] 2 AC 506, [2004] 2 All ER 1042...............................................................................2.11.3.1, 2.11.3.2 Secretary of State for Trade & Industry v Gash sub nom Secretary of State for Trade & Industry v Taylor [1997] 1 WLR 407, [1997] BCC 172, [1997] 1 BCLC 341...6.5.1 Secretary of State for Trade & Industry v Gill see Re UNO plc Secretary of State for Trade & Industry v Thornbury [2007] EWHC 3202 (Ch), [2008] BCC 768, [2008] 1 BCLC 139...............................................................................6.4.7.5 Secretary of State for Work & Pensions & the Board of the Pension Protection Fund v Hughes [2021] EWCA Civ 1093, [2021] 7 WLUK 212, [2022] ICR 215.............10.4.2.2 Shamji v Johnson Matthey Bankers [1991] BCLC 36....................................................9.3.3.1 Sheppard & Cooper Ltd v TSB Bank plc (No 2) [1996] 2 All ER 654, [1996] BCC 965..........................................................................................................................9.3.3.2 Sherborne Associates Ltd, Re [1995] BCC 40................................................................6.4.2.1 Shoe Lace Ltd, Re sub nom Power v Sharp Investments [1993] BCC 609, [1994] 1 BCLC 111...............................................................................................................5.6.2 Silven Properties Ltd v Royal Bank of Scotland plc [2003] EWCA Civ 1409, [2004] 1 WLR 997[2004] 4 All ER 484............................................  4.7.1; 9.2.1.3, 9.7.2, 9.7.2.2

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Table of Cases Sinai Securities Ltd v Hooper [2003] EWHC 910 (Ch), [2004] BCC 973, [2004] 2 BCLC 575...............................................................................................................4.4.3 Singer v Beckett [2007] 2 BCLC 287, [2001] BPIR 733...............................................6.5.2 Singla v Hedman [2010] EWHC 902 (Ch), [2010] BCC 684, [2010] 2 BCLC 61........6.4.2.2 Singularis Holdings Ltd v PricewaterhouseCoopers (Bermuda) [2014] UKPC 36, [2015] AC 1675, [2015] 2 WLR 971......................................................................12.5 Sisu Capital Fund Ltd v Tucker (Costs) [2005] EWHC 2321 (Ch), [2006] 1 All ER 167, [2006] BCC 463...................................................................................8.2.6.1, 8.2.6.2 Smile Telecoms Holdings Ltd, Re [2021] EWHC 685 (Ch), [2021] 3 WLUK 380.......8.3.8.2 Smile Telecoms Holdings Ltd, Re [2022] EWHC 387 (Ch), [2022] 1 WLUK 447.......8.3.4.3 Smile Telecoms Holdings Ltd, Re [2022] EWHC 740 (Ch), [2022] Bus LR 591, [2022] 3 WLUK 433...............................................................................................12.6.5.2 Smith (administrator of Cosslett (Contractors) Ltd) v Bridgend County Borough Council sub nom Cosslett (Contractors) Ltd (in administration) (No 2), Re [2001] UKHL 58, [2002] 1 AC 336, [2001] 3 WLR 1347.....................................2.11.3.1 Smithton Ltd (formerly Hobart Capital Markets Ltd) v Naggar [2014] EWCA Civ 939, [2015] 1 WLR 189, [2014] BCC 482.............................................................6.2.2 Soden v British & Commonwealth Holdings plc (in administration) [1998] AC 298, [1997] 3 WLR 840, [1997] 4 All ER 353...............................................................2.10 Somji v Cadbury’s Schweppes plc [2001] 1 WLR 615, [2001] 1 CLC 498, [2001] BPIR 172 ................................................................................................................8.2.6.3 Sonatacus Ltd, Re [2007] EWCA Civ 31, [2007] BCC 186, [2007] 2 BCLC 627........5.2.6 Southern Cross Group plc v Deka Immoblien Investment GmbH [2005] BPIR 1010...3.4.3.2 Sovereign Life Assurance Co (in liquidation) v Dodd [1892] 2 QB 573........................8.3.3.1 Spaceright Europe Ltd v Baillavoine [2011] EWCA Civ 1565, [2012] 2 All ER 812, [2012] ICR 520.......................................................................................................10.3.5.1 Spectrum Plus Ltd (in liquidation), Re [2005] UKHL 41, [2005] 2 AC 680, [2005] 3 WLR 58 ..................................................................................................................2.3.8 Standish v Royal Bank of Scotland plc [2019] EWHC 3116 (Ch), [2020] 1 All ER (Comm) 814, [2019] 11 WLUK 263......................................................................6.2.3 Stanford International Bank Ltd (in receivership), Re [2010] EWCA Civ 137, [2011] Ch 33, [2010] 3 WLR 941.............................................................................12.2.4.2, 12.3 Staubitz-Schreiber, Re (Case C-1/04) [2006] ECR I-701, [2006] BCC 639, [2006] IL Pr 30 12.2.4.3 Stead Hazel Co v Cooper [1933] 1 KB 840....................................................................3.8.6 Stonegate Securities Ltd v Gregory [1980] Ch 576, [1980] 3 WLR 168, [1980] 1 All ER 241 ...................................................................................................................3.4.3.2 Storm Funding Ltd (in administration), Re [2013] EWHC 4019 (Ch), [2014] Bus LR 454, [2014] Pens LR 73..........................................................................................11.8.2.2 Structures & Computers Ltd, Re [1998] BCC 348, [1998] 1 BCLC 292.......................4.6.5.9 Sunbird Business Services Ltd, Re [2020] EWHC 2493 (Ch), [2021] 2 All ER (Comm) 1019, [2020] Bus LR 2371......................................................................................8.2.5.3 Switch Services Ltd (in administration), Re see SB Corporate Solutions Ltd v Prescott System Building Services Group Ltd (in liquidation), Re [2020] EWHC 54 (Ch), [2020] 2 All ER (Comm) 565, [2020] 1 WLUK 114..............................................6.7.2 T T & D Industries plc, Re [2000] 1 WLR 646, [2000] 1 All ER 333, [2000] BCC 956..4.8.1 T & N Ltd, Re [2004] EWHC 2361 (Ch), [2005] 2 BCLC 488, [2005] Pens LR 1.......8.2.6.2 TH Knitwear (Wholesale) Ltd, Re [1988] Ch 275, [1988] 2 WLR 276, [1988] 1 All ER 860 ...................................................................................................................3.7.3 TM Kingdom Ltd (in administration), Re [2007] EWHC 3272 (Ch), [2007] BCC 480... 4.11.5 TXU Europe German Finance BV, Re [2005] BCC 90, [2005] BPIR 209....................11.2 Tain Construction Ltd, Re sub nom Rose v AIB Group (UK) plc [2003] EWHC 1737 (Ch), [2003] 1 WLR 2791, [2003] 2 BCLC 374.....................................................5.7.4.2 Tasbian Ltd (No 3), Re [1992] BCC 358, [1993] BCLC 297.........................................6.2.2 Taylors Industrial Flooring v M & H Plant Hire (Manchester) Ltd [1990] BCC 44, [1990] BCLC 216...................................................................................................3.4.3.1

xxxiv

Table of Cases Tea Corpn, Re [1904] 1 Ch 12........................................................................................8.3.4.2 Television Trade Rentals, Re [2002] EWHC 211 (Ch), [2002] BCC 807, [2002] BPIR 859 .........................................................................................................................12.4 Telewest Communications plc (No 1), Re [2004] EWCA Civ 728, [2005] BCC 29, [2005] 1 BCLC 752................................................................................................8.3.3.2 Temporary Insolvency Practice Direction (No 5) Supporting the Insolvency Practice Direction [2021] 9 WLUK 495, [2021] BCC 877, [2021] BPIR 1613.............1.2.7; 3.4.4; 4.3.4; 7.3.2 Thoars (deceased), Re sub nom Reid v Ramlort Ltd (preliminary issue) [2002] EWHC 2416 (Ch), [2003] 1 BCLC 499, [2003] BPIR 489.................................................5.2.2 Thomas v Frogmore Road Real Estate Partners GP1 Ltd [2017] EWHC 25 (Ch), [2017] Bus LR 1117, [2017] 2 BCLC 101.............................................................4.11.7 Thomas v Ken Thomas Ltd [2006] EWCA Civ 1504, [2007] Bus LR 429, [2007] BPIR 959.................................................................................................................10.2.5.2 Thompson v SCS Consulting Ltd [2001] IRLR 801, [2001] Emp LR 1238..................10.3.5.1 Thorniley v R & C Comrs sub nom Airbase (UK) Ltd, Re [2008] EWHC 124 (Ch), [2008] 1 WLR 1516, [2008] BCC 213...................................................................2.6.2 Toshoku Finance (UK) plc, Re [2002] UKHL 6, [2002] 1 WLR 671, [2002] BCC 110..........................................................................................................................2.4.3.2 Tottenham Hotspur v Ryman sub nom Edennote Ltd, Re [1996] BCC 718, [1996] 2 BCLC 389, (1996) 93 (25) LSG 28........................................................................3.9.3 Transbus International Ltd (in liquidation), Re [2004] EWHC 932 (Ch), [2004] 1 WLR 2654, [2004] 2 All ER 911............................................................................4.8.1 Transmetro Corpn Ltd v Real Investment Ltd Pty (1999) 17 ACLC 1314.....................3.6.1.1 Trident Fashions Ltd, Re see Exeter City Council v Bairstow Trillium (Nelson) Properties Ltd v Office Metro Ltd see, Re Office Metro Ltd Tse Kwong Lam v Wong Chit Sen [1983] 1 WLR 1349, [1983] 3 All ER 54, (1983) 80 LSG 2368...........................................................................................................9.2.2 U UNO plc, Re sub nom Secretary of State for Trade & Industry v Gill [2004] EWHC 933 (Ch), [2006] BCC 725..............................................................................6.4.7.1, 6.5.4 USDAW v WW Realisation 1 Ltd (in liquidation) (Case No 3201156/2010)................10.3.2.3 Union Accident Insurance Co Ltd, Re (Costs) [1972] 1 WLR 640, [1972] 1 All ER 1105, [1972] 1 Lloyd’s Rep 340.............................................................................6.7.1.1 Unite the Union, Re sub nom McCartney v Nortel Networks UK Ltd (in administration) [2010] EWHC 826 (Ch), [2010] BCC 706, [2010] 2 BCLC 674...........................10.3.2.4 V Vedmay Ltd, Re [1993] 9 WLUK 101, [1994] 1 BCLC 676, (1994) 26 HLR 70..........3.6.4 Ve Vegas Investors IV LLC v Shinners [2018] EWHC 186 (Ch), [2018] 2 WLUK 202, [2019] BPIR 438.....................................................................................................4.10.5 Videology Ltd, Re [2018] EWHC 2186 (Ch), [2018] 8 WLUK 157, [2019] BCC 195.12.3 Virgin Active Holdings Ltd, Re [2021] EWHC 1246 (Ch), [2022] 1 All ER (Comm) 1023, [2021] 5 WLUK 129.....................................................................................8.3.7.7 Virgin Atlantic Airways Ltd, Re [2020] EWHC 2191 (Ch), [2020] 8 WLUK 120, [2020] BCC 997 ............................................................................8.3.1.1, 8.3.2.3, 8.3.3.3, 8.3.4.1, 8.2.5.3 Virgin Atlantic Airways Ltd, Re [2020] EWHC 2376 (Ch), [2020] 9 WLUK 39, [2020] BCC 997 .....................................................................................................8.3.7.6 W WW Realisation 1 Ltd (in administration), Re [2010] EWHC 3604 (Ch), [2011] BCC 382, [2012] 1 BCLC 405........................................................................................4.8.2 Walker v WA Personnel Ltd [2002] BPIR 621...............................................................5.2.6 Wallrock v Equity & Law Life Assurance Society [1942] 2 KB 82, [1942] 1 All ER 510..........................................................................................................................10.2.8.2

xxxv

Table of Cases West Mercia Safetywear Ltd (liquidator of) v Dodd (1988) 4 BCC 30, [1988] BCLC 250, [1988] PCC 212..............................................................................................6.3.2 Westbury v Twigg & Co Ltd [1892] 1 QB 77.................................................................3.5.4 White v City of London Brewery Co (1889) 42 Ch D 237.............................................9.2.1.2 White v Davenham Trust Ltd [2010] EWHC 2748 (Ch), [2011] Bus LR 615, [2011] BCC 77 ..................................................................................................................5.5.1 Wills v Wood (1984) 81 LSG 1211, (1984) 128 SJ 222.................................................5.5.1 Windsor Steam Coal Co (1901) Ltd, Re [1929] 1 Ch 151..............................................3.7.3 Y Yeovil Glove Co Ltd, Re [1965] Ch 148, [1964] 3 WLR 406, [1964] 2 All ER 849.....5.6.2 Yorkshire Woolcombers Association Ltd, Re sub nom Illingworth v Houldsworth [1903] 2 Ch 284......................................................................................................2.3.4

xxxvi

Chapter 1

What are insolvency and restructuring?

1.1 INTRODUCTION 1.1.1  What does ‘insolvency’ mean? The words ‘insolvent’ and ‘insolvency’ go to the heart of much of this book. However, neither term is defined in the insolvency legislation, and both are often used fairly loosely. Where a person refers to a company as ‘insolvent’, they may have one of two different scenarios in mind. They may be thinking that the company is no longer able to meet all of its financial commitments. The legislation does not describe such a company as insolvent. Instead, it introduces the term ‘unable to pay its debts’, the meaning and implications of which are discussed in Section 1.3. Alternatively, they may be referring to a company which is in a process such as administration or liquidation, where control of the company’s affairs has been taken away from the directors and placed in the hands of a suitably qualified professional. Administration and liquidation are examples of formal insolvency processes, and some of the features of these processes are summarised in Section 1.4. The administrators, liquidators or other formal appointees who take over the running of a company in a formal insolvency process are often generically referred to as insolvency officeholders. In the majority of cases, in order to take an appointment as an insolvency officeholder, an individual will need to be a suitably qualified insolvency professional who is a member of a recognised professional body and who is licensed to take such appointments. These recognised professional bodies include the Insolvency Practitioners Association and the Institute of Chartered Accountants in England and Wales, although there had been a recent consultation as to whether there should just be a single regulator. Such an individual will be referred to in this book as a qualified insolvency practitioner, and will in practice most often be a partner in a firm of accountants.

1.1.2  What does ‘restructuring’ mean? A  restructuring is a privately negotiated contractual arrangement between the company, some or all of its creditors and (possibly) some or all of its other stakeholders. Such an arrangement may allow the company to avoid a formal insolvency process altogether. Alternatively, one or more members of a group of companies may enter into a formal insolvency process as one of the steps required to achieve the restructuring. Section 1.6 gives a brief outline of the considerations involved in implementing a restructuring, although they are discussed in more detail in Chapter 11. 1

1.2  What are insolvency and restructuring?

1.2  WHERE IS CORPORATE INSOLVENCY LAW FOUND? 1.2.1  The Insolvency Act 1986 The main piece of primary legislation codifying English insolvency law is the Insolvency Act 1986, referred to in this book as the ‘IA  1986’. The IA  1986 has been amended from time to time by subsequent legislation, most significantly the Enterprise Act 2002, referred to in this book as the ‘EA  2002’ and the Corporate Insolvency and Governance Act 2020, referred to in this book as ‘CIGA 2020’. As a result, the layout of the IA  1986 has grown somewhat complex – for example, the bulk of the legislation relating to the administration procedure is now found in Schedule B1 to the Act.

1.2.2  The Companies Act 2006 The statutory provisions relating to schemes of arrangement and restructuring plans are found not in the IA 1986 but in the Companies Act 2006, referred to in this book as the ‘CA 2006’. These procedures are considered further in Sections 1.4.7 and 1.4.8. Slightly incongruously, a few other provisions relating to insolvency are also found in the CA  2006. These include s  754  CA  2006 (which relates to the payment of debts out of assets subject to a floating charge) and s 993 CA 2006 (which concerns fraudulent trading).

1.2.3  The Retained EU Insolvency Regulation The main piece of EU legislation in this area is Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on Insolvency Proceedings, which applies to insolvency proceedings commenced on or after 26 June 2017. It is referred to in this book as the ‘EU Insolvency Regulation’. It replaces or ‘recasts’ an earlier Regulation and is thus also frequently referred to as the ‘Recast Insolvency Regulation’. This Regulation is still effective as primary legislation in the UK in its own right where the relevant proceedings were opened prior to 11 pm on 31 December 2020. However, where the proceedings are opened after that time and date, only those parts of the EU Insolvency Regulation which the United Kingdom has retained as part of its domestic legislation (the ‘Retained EU Insolvency Regulation’) will apply. The provisions of the Retained EU Insolvency Regulation are considered further in Chapter 12. As will be seen, it does not seek to create any insolvency rules in its own right. However, since its provisions will dictate whether many types of insolvency process can be commenced in the UK at all, it remains potentially relevant to any formal insolvency.

1.2.4  Other primary legislation Some of the law governing the ability of a secured creditor to enforce its security is still found in the Law of Property Act 1925 although, as explained in Section 1.4.4, this is usually supplemented by the terms of any security document. 2

What are insolvency and restructuring? 1.2 The Company Directors Disqualification Act 1986, referred to in this book as the ‘CDDA 1986’, contains provisions dealing with the disqualification of directors of an insolvent company by a court where it finds that they are unfit to be involved in the management of a company – these provisions are considered further in Chapter 6. Finally, specific legislation will sometimes supplement or amend the effect of the IA 1986 in order to introduce modified insolvency regimes for certain industries or institutions. Examples include the Building Societies Act 1986 and the Banking Act 2009, although discussion of these modified regimes is beyond the scope of this book.

1.2.5  The Insolvency (England and Wales) Rules 2016 The IA  1986, and some of the other primary legislation, also gives the relevant government minister (currently the Secretary of State for Business, Energy and Industrial Strategy) the power to make additional orders and regulations, or ‘secondary legislation’, by statutory instrument. The most important of these regulations are the Insolvency (England and Wales) Rules 2016 (SI 2016/1024) which are referred to in this book as the ‘IR  2016’. They heavily supplement the IA  1986 and deal, in particular, with many of the procedural aspects of the formal insolvency processes described in that Act.

1.2.6  Other secondary legislation A  large number of other pieces of secondary legislation have been made which impact upon our insolvency law. Some, like the Insolvent Partnerships Order 1994 (SI  1994/2421) supplement corporate insolvency law, whilst others, like the Financial Collateral Arrangements (No 2) Regulations 2003 (SI 2003/3226), exclude provisions of corporate insolvency law altogether in relation to certain transactions. They are too numerous to list them all here, but will be considered where relevant.

1.2.7  Practice directions and statements A number of practice directions have also been issued to supplement the legislation. They aim to achieve uniformity of practice in processes where the courts are involved and indicate what the courts expect of the parties. For example, Practice Direction: Insolvency Proceedings [2020]  BCC  698 and Temporary Insolvency Practice Direction (No  5) Supporting the Insolvency Practice Direction [2021]  BCC  877 contain some of the procedural aspects for putting a company into liquidation or administration. Up-to-date versions of these can be found at www.justice.gov.uk/ courts/procedure-rules/civil/rules. Similarly, a practice statement, Practice Statement (Companies: Schemes of Arrangement under Part 26 and Part 26A of the Companies Act 2006) supplements the legislation relating to schemes of arrangement and restructuring plans. This practice statement is quite detailed, due in part to the fact there is no equivalent secondary legislation to the IR 2016 which applies to these to procedures.

1.2.8  Court-made law The common law also has a big part to play. The courts have been left to develop much of the law governing security and its enforcement – as a result, the bulk of 3

1.3  What are insolvency and restructuring? the law relating to these actions will not be found in any statutory legislation, even where it concerns the interaction of secured creditors’ rights with those of other stakeholders. For instance, the insolvency legislation has never completely clarified the ranking of secured creditors’ claims vis-à-vis all of the other claims and expenses in a formal insolvency process. Judges have been left to decide the position, and this has at times led to some controversial and inconsistent decisions – see Chapter 2.

1.2.9  Statements of Insolvency Practice Statements of Insolvency Practice, or ‘SIPs’ are guidance notes issued to qualified insolvency practitioners with a view to maintaining standards. They set out required practice and thus aim to harmonise practitioners’ approaches to particular aspects of insolvency, particularly in areas where the law is thought to be silent or ambiguous. They are prepared by the Association of Business Recovery Professionals (usually known as ‘R3’) for the Joint Insolvency Committee (‘JIC’), an industry forum for the discussion of insolvency issues and professional ethics. If approved by the JIC, they are adopted by each of the recognised professional bodies of which qualified insolvency practitioners are members. SIP  16, which applies in relation to prepackaged administations and which is discussed in Chapter  4, is a particularly noteworthy example. SIPs do not have legislative effect. However, departure from the standard(s) set out in the SIP(s) may result in disciplinary or regulatory action from the practitioner’s professional body. Those SIPs which are current at any time may be found on the R3 website, www.r3.org.uk.

1.3  INABILITY TO PAY DEBTS 1.3.1  When is a company unable to pay its debts? Under s 123 IA 1986, a company is deemed unable to pay its debts: •

If a creditor (by assignment or otherwise) to whom the company owes over £750 has served on the company a written demand (in the prescribed form) requiring payment of the sum due and the company has failed at any time during the following three weeks to pay that sum or to secure or compound for it to the reasonable satisfaction of the creditor (s 123(1)(a)). The written demand in question is usually known as a ‘statutory demand’. In practice, it is now the content rather than the form of this written demand which is prescribed (see Section 3.4.3.1).

•

If, in England and Wales, execution or other process issued on a judgment, decree or order of any court in favour of a creditor of the company is returned unsatisfied in whole or in part (s 123(1)(b)).

•

If it is proved to the satisfaction of the court that the company is unable to pay its debts as they fall due (s 123(1)(e)). This is generally known as the ‘cashflow test’.

•

If it is proved to the satisfaction of the court that the value of the company’s assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities (s 123(2)). This is generally known as the ‘balance sheet test’. 4

What are insolvency and restructuring? 1.3

1.3.2  Why is there a need for a variety of tests? The cash-flow test and the balance sheet test are the two main tests to determine whether a company is unable to pay its debts. However, in order for a creditor to show that a company fails one of these two main tests, it has to prove to the satisfaction of the court that this is the case. This would require the creditor to produce evidence, even in cases where the company seems obviously to be in trouble. In other cases, a detailed analysis of the company’s position may be required, which may be difficult, particularly if the creditor has access to little other than publicly available information (which may already be out of date). The company may well dispute the evidence put forward. The statutory demand route and the unsatisfied judgment test therefore provide far more straightforward routes by which a creditor may establish that a company is unable to pay its debts, for example, where it intends then to present a winding-up petition (see Chapter 3).

1.3.3  The cash-flow test Only debts need to be taken into account, and for these purposes a debt means a liquidated claim. A claim for damages, for example, is not therefore a ‘debt’ for these purposes. However, debts in a fixed amount which have already fallen due but which remain unpaid clearly will need to be taken into account for the purposes of this test. If a company fails to pay a debt which has fallen due and which is not disputed, this can be sufficient evidence in itself of cash-flow insolvency, even if the company can produce strong evidence that its assets exceed its liabilities. This is illustrated in the case of Cornhill Insurance plc v Improvement Services Ltd [1986] 1 WLR 114, where the company in question was a well-known insurance company with a substantial business, but which despite various chasing letters had failed to pay a debt of £1,154 which it had orally agreed to be due. The court was satisfied that the creditor was entitled to present a winding-up petition. Nevertheless, in Hat & Mitre Plc [2020]  EWHC  2649 (Ch) the court stated that neither an insufficiency of cash to pay immediate liabilities nor a need to borrow to pay short term liabilities are necessarily an indication of a present inability to pay debts; all of the circumstances of the case must be looked at. In BNY Corporate Trustee Services Limited v Eurosail-UK 2007-3BL Plc and others [2013]  UKSC  28, Lord Walker made it clear that the cash-flow test is not simply concerned with presently due debts owed by the company, but also with debts falling due from time to time in the reasonably near future. What is ‘the reasonably near future’ for this purpose will depend on all of the circumstances, but especially on the nature of the company’s business. However, once the court has to move beyond debts falling due in the reasonably near future, any attempt to apply a cash-flow test will become completely speculative. The only sensible test would then become the balance sheet test, as described in Section 1.3.4. The courts regard the extension of the cash-flow test into the near future as a matter of commercial common sense. In the earlier case of Cheyne Finance plc (In Receivership) [2008]  BCC  182 the judge gave an example of this. He considered a hypothetical company which had £1,000 of ready cash and a very valuable but 5

1.3  What are insolvency and restructuring? very illiquid asset worth £250,000 which could not be sold for two years. It had a present debt of £500 but a future debt of £100,000 due in six months’ time. The judge’s view was that, whilst such a company might be balance sheet solvent, on any commercial view it could not pay its debts as they fell due so would already be ‘cash-flow’ insolvent. Nevertheless, it will be easier to look into the near future for a company which is not trading and which has a future cash-flow profile which is very clear. It will be more difficult for a trading company. At a practical level, it still feels unlikely that a company would fail the cash-flow test if: •

it reaches agreement with suppliers whose debts are due for payment that the dates of payment will be extended to some new, future date;

•

it has an on-demand bank overdraft, but the bank has not yet made demand for repayment; or

•

it has given a guarantee of a third-party liability, but demand for repayment has not yet been made under the guarantee.

However, a company is likely to fail the cash-flow test if it fails to pay its suppliers’ invoices on their due dates without agreeing otherwise with those suppliers, or if demand is made under an overdraft or a guarantee and the company cannot pay the amount demanded in full.

1.3.4  The balance sheet test Here, it is not enough simply to look at the most recent balance sheet which the company has prepared as part of its normal accounting requirements, as this test views assets and liabilities differently to their treatment in a company’s accounts. In valuing assets for the purpose of this test, it is necessary to consider the likely actual realisation value of those assets, not simply their book value used in the accounts. It is also necessary to consider whether the assets should be valued on a going concern or a break-up basis. This will depend on the circumstances, but essentially the question turns on whether or not the company’s business could still survive, or be sold as a going concern. In both the Eurosail case and Evans v Jones [2016]  EWCA  Civ 660, the Supreme Court and the Court of Appeal respectively made it clear that the assets to be valued are the present assets of the company only – the balance sheet test does not take into account contingent or prospective assets. In Burnden Holdings (UK) Limited (in liquidation) v Fielding [2019] EWHC 1566 (Ch), the court noted, however, that where the company’s assets include receivables which the relevant third party debtor might not have the resources to pay at that moment in time, it is still permissible to take into account that debtor’s future trading prospects when valuing those receivables as assets of the company without offending this principle. The liabilities to be taken into account must include any contingent and prospective liabilities – these are not found on a normal balance sheet. A contingent liability is one which may arise out of an existing legal obligation or set of circumstances depending on the occurrence of some further event, which event may or may not occur. An example is the liability of a guarantor under a guarantee – a 6

What are insolvency and restructuring? 1.3 legal obligation is created when the guarantee is entered into, but the liability arises only when the principal debtor defaults. A prospective liability is a liability which will certainly become due in the future, either on some date which has already been determined or on some date determinable by future events. It has been held to include not only debts which have not yet fallen due for payment, but also any undisputable claims for unliquidated damages for more than a nominal amount – even if those damages have yet to be quantified (Re Dollar Land Holdings [1994] 1 BCLC 404). In the Eurosail case, it was made clear that contingent and prospective liabilities should not simply be taken into account at their face amounts for the purposes of this test. A liability of £x which would become due in ten years’ time should not be treated as a present liability of £x. This would not take account of the company’s ability to find the monies to meet this liability during the intervening period. Lord Walker endorsed the following summary of the balance sheet test by Toulson LJ in the Court of Appeal: ‘Essentially, section 123(2) requires the court to make a judgment whether it has been established that, looking at the company’s assets and making proper allowance for its prospective and contingent liabilities, it cannot reasonably be expected to meet those liabilities. If so, it will be deemed insolvent although it is currently able to pay its debts as they fall due. The more distant the liabilities, the harder this will be to establish.’ However, he expressly rejected a suggestion by Lord Neuberger MR in the Court of Appeal that a company would only fail the balance sheet test once it had passed ‘the point of no return’. The following are examples of the courts’ approach to taking into account contingent and prospective liabilities: •

In the Eurosail case itself, the company was a single purpose vehicle which did not trade. It had acquired a portfolio of mortgage loans, secured on UK residential property, and had issued loan notes to investors, variously denominated in sterling, dollars and euros. It was forecast to have a deficiency of assets compared to liabilities. However, possible variables included changes in interest rates and fluctuations in currency exchange rates. In addition, the loan notes were not due to be redeemed for more than 30 years. Therefore, the court was unable to find that Eurosail was balance sheet insolvent.

•

By way of contrast, in Re HLC Environmental Projects Limited (in liquidation) [2013] EWHC 2876 (Ch), the court made it clear that the starting point for any assessment of balance sheet insolvency remained the company’s accounts and that any net deficit in the accounts would be prima facie evidence of insolvency, albeit not conclusive evidence of such. Furthermore, where the commercial reality was that a contingent liability not shown in the accounts would almost certainly result in a liability becoming immediately due within the next 18 months, it would be taken into account at its full face value.

• In Re Kestrel Acquisitions Limited [2015] EWHC 916 (Ch), the court held that it was possible, in principle, to take into account the prospect of a restructuring of the company’s indebtedness for the purposes of the balance sheet test. However, the court found that, on the facts of that particular case, there was insufficient evidence of a concrete restructuring plan. 7

1.3  What are insolvency and restructuring? There is a view that an estimate of the likely expenses of any administration or liquidation should also be included as prospective liabilities when determining whether a company passes the balance sheet test. The argument is that, were the company to enter into one of these processes, the relevant expenses would need to be discharged before the company’s ordinary unsecured creditors could be paid (see Chapter  2). Certainly, this seems appropriate when the balance sheet test is being applied to decide whether a company should actually be placed into administration or liquidation. It may be less relevant when the directors are simply reviewing whether to continue to trade.

1.3.5  What are the implications of a company being unable to pay its debts? The fact that a company is unable to pay its debts does not automatically mean that it must stop trading. It is neither a criminal offence nor an actionable civil matter for a director to continue to trade a company which is unable to pay its debts. The consequences for directors occur only if a formal insolvency process subsequently ensues. A company may fail the balance sheet test and continue to survive for some time. However, if that company entered into a formal insolvency process, it would then have insufficient resources to repay all of its creditors. A company may still survive if it fails the cash-flow test, although the reality is that a trading company is unlikely to be able to carry on for any length of time if it runs out of cash, regardless of its net asset position. An unpaid creditor is likely sooner or later to take its own recovery action. For this reason, the cash-flow test is often regarded as the more relevant of the two tests. The implications for a company and its directors where the company is unable to pay its debts do, however, include the following: •

an unpaid creditor can obtain an order for the company’s winding-up, as described in Chapter 3;

•

it is a necessary condition that a company is unable to pay its debts or is likely to become so before it can be placed into administration (unless the person seeking to put the company into administration holds a ‘qualifying floating charge’), as described in Chapter 4;

•

certain payments made or transactions entered into by the company will be at risk of being set aside if the company enters into liquidation or administration, as described in Chapter 5;

•

the directors must start to balance the interests of creditors against those of members, as described in Chapter 6; and

•

an inability to pay debts may be an event of default in its own right under the company’s finance documents and other key contracts.

In addition, the fact that the directors will be at risk of personal liability for wrongful or fraudulent trading (if the company subsequently enters into liquidation or administration) and of disqualification (if the company subsequently enters into liquidation or administration or has an administrative receiver appointed) means that in practice directors need to be acutely aware of various factors that could mean that the company is unable to pay its debts, as described in Chapter 6. 8

What are insolvency and restructuring? 1.4

1.4  WHAT ARE THE POSSIBLE FORMAL PROCESSES? 1.4.1 Overview The main formal processes available for an insolvent company are set out in Table 1.1. These are also summarised briefly below. (The term ‘formal process’ is used here instead of ‘formal insolvency process’ because some of the processes covered, particularly members’ voluntary liquidation and schemes of arrangement are not generally thought of as insolvency processes.) Table 1.1 – Formal processes Process (+ sub-category)

Description

Insolvency officeholder

Moratorium?

Liquidation (= winding-up)

Collective insolvency procedure

Liquidator (initially chosen by members)1

No – liquidator Yes needs to apply for a stay

Liquidator (initially Official Receiver)1

Yes – although will not affect secured creditors

Creditors’ voluntary liquidation (‘CVL’) Compulsory liquidation

Provisional liquidation

Administration

Receivership

Optional Provisional precursor to liquidator1 a compulsory liquidation Collective insolvency procedure

Distribution mechanism to ordinary unsecured creditors?

Yes – although No2 will not affect secured creditors

Administrator1 Yes3 – can affect secured creditors

Yes – but only if sanctioned by the court6

Administrative Secured receivership creditors’ remedy4

Administrative No receiver1

No2

Nonadministrative receivership

Receiver

Yes

No

Statutory Supervisor1 compromise with creditors

Possibly5

Yes

Scheme of arrangement

Statutory None compromise with creditors and/or members

Possibly5

Yes

Restructuring plan

Statutory None compromise with creditors and/or members

Possibly5

Yes

Part A1 Moratorium

Standalone moratorium

Company voluntary arrangement (‘CVA’)

Monitor1

1 Must be qualified to act as an insolvency practitioner.

9

1.4  What are insolvency and restructuring? 2 Although there are requirements to set aside enough monies to cover the ‘prescribed part’ – see Chapter 2. 3 A moratorium will commence on the date on which the application for an administration order is made, or notice of intention to appoint is filed at court. 4 An administrative receiver has some additional duties (for example, to pay preferential creditors). 5 The company might use a Part A1 Moratorium for the period before the creditors vote to approve the relevant process. Alternatively, the company might first be placed into administration to take advantage of the administration moratorium – see Chapter 8. 6 Except in relation to the ‘prescribed part’.

1.4.2 Liquidation Liquidation or ‘winding-up’ (the terms are broadly synonymous and used interchangeably in the legislation) is the process by which a company’s operations as a going concern are terminated. The powers of its directors to manage its affairs are superseded by the powers of a qualified insolvency practitioner, the liquidator, who is appointed to implement the liquidation. The company’s assets are realised (liquidated) by the liquidator and the proceeds distributed to satisfy the company’s debts and liabilities, as far as possible. Chapter 2 includes a full discussion of the order in which the assets are distributed. There are two types of liquidation. It is important to identify which type of liquidation a company is in, as different rules will apply. Voluntary liquidation is initiated by a resolution of the company’s members (who will in most cases be its shareholders) that it should be wound up. There are, in turn, two types of voluntary liquidation. The distinction between the two is that: •

if the directors swear a statutory declaration that the company will be able to pay its debts (including contingent and prospective debts) and the costs of the winding-up in full within such period, not exceeding twelve months from the commencement of the winding-up, as may be specified in the declaration, the liquidation will be a members’ voluntary liquidation;

•

if the directors cannot, or do not wish to swear a declaration to that effect, the liquidation will be a creditors’ voluntary liquidation.

There are in turn different sets of rules for these two types of voluntary liquidation. The creditors will take no part in a members’ voluntary liquidation beyond receiving payment of what they are owed in full. A creditors’ voluntary liquidation, however, needs to involve the creditors in the process, and the rules reflect this. Regardless of the type of voluntary liquidation, the liquidator will generally be appointed by the members at the same time as they resolve to place the company in liquidation. However, in a creditors’ voluntary liquidation, the directors must seek a decision from the creditors on the identity of the liquidator no later than 14 days after the date of the members’ resolution, and the creditors may accordingly decide to substitute their own choice of liquidator if they so wish. Compulsory liquidation results from the court making an order, termed a ‘windingup order’, that the company be liquidated following the presentation of a petition, termed a ‘winding-up petition’, requesting such an order. Normally this petition is presented by a creditor, although it may also be presented by a member of the company or by the company itself (or its directors). When the court makes a windingup order, the Official Receiver (who is a government official) is initially appointed as the liquidator, but the creditors have the power to appoint a replacement if they wish. 10

What are insolvency and restructuring? 1.4 The vast majority of companies which are placed into compulsory liquidation are unlikely to continue to trade. However, occasionally compulsory liquidation has been used for very large, complex companies which, for various reasons, would not have found a private insolvency practitioner willing to act as administrator. In those cases while the Official Receiver has been appointed and remained the liquidator, an appropriately-skilled special manager has also been appointed by the court to assist the Official Receiver in dealing with the company’s business or property. Both creditors’ voluntary liquidation and compulsory liquidation are ‘collective’ insolvency processes, carried out for the benefit of all unsecured creditors, and in which the liquidator owes duties to those creditors. In a compulsory liquidation, unsecured creditors are prevented from taking or continuing various enforcement actions without the leave of the court. A secured creditor, however, stands outside of any liquidation process and is free to enforce its security unaffected by the liquidation. A  liquidation which commences as a members’ voluntary liquidation must be converted to a creditors’ voluntary liquidation if it appears that the creditors will not, after all, be paid in full. In addition, a voluntary liquidation may be converted into a compulsory winding-up at any time by the court making an order to that effect. Where a winding-up petition has been issued, the court may also appoint a provisional liquidator to manage the company pending the making of the winding-up order itself. The court has a wide discretion over the powers it can give to a provisional liquidator, but the intention is usually to ensure the preservation of the status quo until the liquidation proper commences. Chapter 3 includes a fuller discussion of the liquidation process.

1.4.3 Administration Administration is a process whereby the company is placed under the control of a qualified insolvency practitioner, the administrator, who has a statutory duty to seek one of the following objectives: •

the rescue of the company as a going concern, failing which

•

a better result for the creditors as a whole than would be likely if the company were to go into liquidation, failing which

•

the realisation of property to enable a distribution to be made to secured (or preferential) creditors, but without unnecessarily harming the interests of the creditors of the company as a whole.

To assist them in achieving one of these objectives the administrator has far wider statutory powers to manage the company’s business and, if necessary, sell its business and assets than are given to a liquidator. A company may be put into administration in one of a number of ways: •

by a court order, in response to an application by the company itself, its directors or any creditor, supported by a witness statement verifying, among other things, that the company is, or is likely to become, unable to pay its debts;

•

by the company itself or its directors filing a notice at court, supported by a statutory declaration verifying that the company is, or is likely to become, unable to pay its debts; or 11

1.4  What are insolvency and restructuring? •

by a creditor holding appropriate security (being a ‘qualifying floating charge holder’) filing a notice at court, supported by a statutory declaration verifying that its security has become enforceable.

A  key feature of administration is the moratorium, which allows the company a temporary ‘breathing space’ whilst the administrator seeks to achieve one of the above objectives. As such, from the date on which the application for an administration order is first made or a ‘notice of intention’ to appoint is first filed at court (see Chapter 4), the company is protected from enforcement action by various creditors (who might otherwise have taken steps to protect their own individual interests) unless the creditor in question first obtains the permission of the court. The moratorium continues once the company enters into administration. Unlike the liquidation moratorium, this moratorium can also prevent secured creditors from enforcing their security. Like liquidation, administration is a collective insolvency process, but in this case the administrator owes duties to all creditors since secured creditors are largely bound by the administration process as well. Some guidance is given in the legislation as to how administrators should reconcile their potentially conflicting duties to secured and unsecured creditors. The administrator is obliged to draw up proposals to be put to the company’s creditors for approval, with the creditors’ decision to be made within ten weeks of the administrator’s appointment. Administration was not originally conceived to be the final process in a company’s life, but merely a step on the path to some other (preferably solvent) process or result. Depending on what proposals are adopted, the company may in due course return to the control of its management (if, for example, a voluntary arrangement, Scheme of Arrangement or Restructuring Plan is adopted) or go into liquidation (if, for example, its business has been sold or an attempt to adopt a voluntary arrangement, Scheme or Plan has been unsuccessful). However, it is also possible for an administrator, with the permission of the court, to make a general distribution to unsecured as well as to secured and preferential creditors if there are sufficient realisations from which to do so before applying for the dissolution of the company. Should the administrator take this route, the administration will sometimes be termed a distributing administration. Although the primary objective of administration remains the rescue of the company, in practice the process most often results in a business sale, followed by a distributing administration or a liquidation. The scope for a company to continue to trade whilst a sale is negotiated is far more flexible than in liquidation, and therefore a sale on better terms may be secured pursuant to an administration. Such a sale may take place before the administrator’s proposals are ever put to the creditors. It is also common for the administrator to enter into a pre-negotiated sale almost immediately following their appointment – this latter process is termed a pre-packaged administration. Chapter  4 includes a fuller discussion of the administration process generally, including pre-packaged administrations, and includes a more detailed comparison of administration with liquidation.

1.4.4 Receivership A creditor (typically a bank or other lender) with security in the form of a mortgage or charge over the company’s assets may, if the terms of their security allow, appoint 12

What are insolvency and restructuring? 1.4 a receiver to enforce their security. Neither the receiver’s appointment nor the subsequent receivership process will generally involve the court at all. A  receiver will typically have the power to manage and sell the assets caught by the security to repay the creditor’s debt. A  receiver appointed in respect of the whole, or substantially the whole, of a company’s property by the holder of a charge comprising (at least in part) a ‘floating’ charge is called an administrative receiver. An administrative receiver is given the same wide statutory powers to manage the company’s business and to sell its business and assets as are given to an administrator, and their powers may have been extended even further by the charge under which they are appointed. However, as a result of changes introduced by the EA 2002, a secured creditor is able to appoint an administrative receiver only if: •

their security was taken prior to 15 September 2003; or

•

one of the so-called City Exceptions applies.

The fact that the power to appoint an administrative receiver is not available to the holder of most charges created after 15 September 2003 means that this process has fallen largely into disuse. In the first ten months of 2022 only one administrative receiver was appointed. Such a chargeholder may nonetheless be able to appoint an administrator (see above), or a receiver over a more limited range of assets. A couple of terms are commonly used to describe these other types of receiver. An LPA receiver, or ‘Law of Property Act’ receiver, is, strictly speaking, appointed only to receive income from an asset and pay that income over to their appointer rather than to sell that asset. However, in practice the terms ‘LPA receiver’ and ‘fixed charge receiver’ are now often used fairly interchangeably to describe any receiver who is not an administrative receiver. This book will refer to any such receiver simply as a ‘non-administrative receiver’. A non-administrative receiver is given very few statutory powers, but their powers will almost always be substantially extended by the charge under which they are appointed. However, a non-administrative receiver (unlike an administrative receiver) may be ousted by the appointment of an administrator, which can mean their appointment is far less effective as a means of debt recovery. A  non-administrative receiver is concerned only with raising sufficient monies to repay the creditor who appointed them. An administrative receiver is also primarily concerned with ensuring repayment of any sums owed to their appointer, although they have, in addition, certain statutory duties designed to give some level of protection to other creditors, particularly in relation to the provision of information to creditors and the protection of preferential unsecured creditors. To the extent that they realise floating charge property, all receivers must set aside the ‘prescribed part’ of such realisations for unsecured creditors (see Chapter 2). However, no receiver has any duty to deal generally with the claims of ordinary unsecured creditors. Accordingly, receivership remains a secured creditor’s remedy, and is not regarded as a collective insolvency process. Chapter  9 includes a fuller discussion of receivership, and of secured creditors’ remedies generally, and a more detailed comparison of this process with administration. 13

1.4  What are insolvency and restructuring?

1.4.5  Standalone moratorium As an alternative to the administration moratorium, or indeed the interim moratorium which applies once an administration application or a notice of intention to appoint an administrator has been filed at court, a standalone moratorium process also exists. This is not connected with any other insolvency procedure or restructuring tool. As the applicable legislation is found in Part A1 IA 1986, this moratorium is commonly referred to as the ‘Part A1 Moratorium’. The Part A1 Moratorium is designed to be a ‘debtor in possession’ procedure where the company continues to be managed by its existing directors rather than being displaced by an insolvency office-holder, as would be the case with administration. However, the directors will still be subject to the supervision of a monitor. The usefulness of the Part A1 Moratorium still has limitations in that, among other things, some types of company are excluded from using it and it cannot be used to prevent finance creditors recovering their debts. Chapter 7 includes a fuller discussion of the Part A1 Moratorium.

1.4.6  Company voluntary arrangement A  company voluntary arrangement (‘CVA’) is a statutory compromise of the company’s debts under the supervision of a qualified insolvency practitioner or certain other approved persons (the supervisor). Typically, a CVA provides for existing creditors to accept partial repayment of their debts out of a fund set up using the existing assets of the company, topped up from the proceeds of future trading over a limited period or (possibly) a contribution from a third party. The fund is administered by the supervisor, who is also responsible for settling the amount of creditors’ qualifying claims. A CVA may be proposed by the directors of a company. Alternatively, if that company is already in administration or liquidation, it may be proposed by the administrator or liquidator. Where the directors are proposing a CVA, they and the proposed supervisor (at this stage called the nominee) will draw up the proposed terms. The proposal is then submitted to the court with a statement of support from the nominee and proposed dates for holding a meeting of the company’s members (who will in most cases be its members) to vote on it and for seeking a decision on it from the creditors. Unless the court for some reason directs otherwise, the nominee will convene the meeting of members and seek a decision from the creditors (for between 14 and 28 days after the court filing) and send notice to all known members and creditors. Creditors learning of the proposal may consider that their interests would be better served by taking enforcement action of their own before the proposal becomes effective. To guard against this, the directors of an eligible company might also take advantage of the Part A1 Moratorium described in Section 1.4.5 as a precursor to the CVA. To be adopted, a CVA must be: •

approved by more than 50% (or as otherwise provided by the company’s articles of association) of the votes cast by the members; and

•

approved by more than 75% of the votes cast by the creditors (and not objected to by more than 50% of the votes of those creditors who are not connected with the company).

Creditors have one vote for every £1 of debt owed to them. Objecting creditors have rights to challenge the CVA within 28 days if they consider that the correct 14

What are insolvency and restructuring? 1.4 procedure was not followed or that the CVA unfairly prejudices their interests. This will result in a court hearing to decide the issue. If the creditors vote differently from the members, the creditors’ vote prevails unless successfully challenged by a member within 28 days. A CVA might in many ways be thought of as a contract between the company and its creditors, but by which a small minority of dissenting creditors may be bound despite their lack of consent. Therefore, it is potentially a very flexible tool, given the wide range of possible terms. However, a CVA cannot bind any preferential or secured creditor without that creditor’s consent, nor indeed is it a tool for adjusting the rights of any shareholder, and this in practice reduces its effectiveness. Chapter 8 includes a fuller discussion of the CVA process.

1.4.7  Scheme of Arrangement One alternative to a CVA is a Scheme of Arrangement under Part 26 CA 2006. This may apply not only as between the company and its creditors or any class of them, but also as between the company and its members (who will in most cases be its shareholders) or any class of them. Essentially, the procedure involves three stages. First, the company (or any creditor, member, administrator or liquidator) may apply to the court for an order convening a meeting of each class of creditor or member affected by the proposed scheme. At this initial hearing, any issues relating to the composition of the class, or classes, of creditors or members who will attend these meeting(s) will be addressed. Notices of these meetings are sent to relevant creditors or members. These notices must be accompanied by the Scheme document and a statement explaining the effect of the proposed arrangement in a way which will enable an ordinary lay person to exercise their judgment. Second, the meeting, or meetings, are held. For the Scheme to be approved: •

a majority in number,

• representing 75% by value, of each of the different classes of creditors and members voting must vote in favour of the proposed scheme. Finally, assuming the proposal has been approved at each meeting, a further application is made to court to sanction the Scheme. At this hearing, ‘fairness’ issues are addressed. The court must be satisfied that the statutory procedure has been complied with. It will be concerned to ensure that each class was fairly represented by those attending the relevant meeting, and the majority in every class is acting bona fide and not attempting to promote an interest which is in fact adverse to the class they claim to represent. The court must also be satisfied that the arrangement is one which an intelligent and honest man who is a member of the relevant class and acting in respect of their own interest might reasonably approve. A member or creditor affected by the Scheme may attend this hearing to seek to persuade the court not to sanction the scheme on the basis that one or other of these requirements was not satisfied. If the court sanctions the Scheme, it will become binding on all creditors and members in the relevant class or classes. Clearly, there are various similarities between this process and the CVA process. Nonetheless, a Scheme of Arrangement does not require the company to be placed 15

1.4  What are insolvency and restructuring? under the control or supervision of an insolvency officeholder, nor does it seek to bind all creditors of the company (as it seeks to bind only those in the class or classes voting on the Scheme). Chapter  8 includes a fuller discussion of the Scheme of Arrangement process generally, including a more detailed comparison of this process with the CVA process.

1.4.8  Restructuring Plan A further alternative to a CVA or Scheme of Arrangement is a Restructuring Plan under Part 26A CA 2006. A  Restructuring Plan has many similarities to a Scheme of Arrangement. It may apply not only as between the company and its creditors or any class of them, but also as between the company and the members or any class of them. A Restructuring Plan may also bind both secured and unsecured creditors. It also involves the same three stages as a Scheme of Arrangement, ie an initial convening hearing, a meeting of each class of creditors and/or members affected by the plan and a final, sanction hearing. For a class of creditors or members to approve the plan, at least 75% by value of those creditors or members must vote in favour. However, there are still some key differences between the two procedures: •

unlike a Scheme, a company looking to use the Restructuring Plan must have encountered or be likely to encounter financial difficulties that are affecting or may affect its ability to carry on business as a going concern;

•

unlike a Scheme, the applicant may seek an order excluding classes of stakeholders with no genuine economic interest from voting;

•

while like a Scheme, for a class of creditors or members to approve a Restructuring Plan 75% by value of those creditors or members voting at the relevant meeting must vote in favour of the proposed Restructuring Plan, unlike a Scheme there is no requirement that a majority by number must also vote in favour; and

•

unlike a Scheme, even where a class of creditors or members has not voted in favour, there is the possibility of cross-class cram-down.

Cross-class cram-down is a mechanism by which the Restructuring Plan still can be imposed at the court’s discretion on the dissenting class or class of dissenting creditors or members provided: •

that none of the members of the dissenting class(es) would be worse off under the Restructuring Plan than they would be under the ‘relevant alternative’, ie the most likely alternative to the Restructuring Plan; and

•

and at least one class with a genuine economic interest in the relevant alternative has voted in favour.

The availability of cross-class cram-down is the biggest difference between a Restructuring Plan and a CVA or Scheme, and thus the feature which makes it such a powerful alternative to those processes in the right circumstances. 16

What are insolvency and restructuring? 1.5

1.5  WHAT IS THE INSOLVENT ENTITY? 1.5.1 Overview It is always worth checking at the outset the type of entity which is insolvent. This book generally considers the insolvency law applicable to companies registered in England and Wales under one of the Companies Acts. Chapter 12 also covers the circumstances where the English court might place a foreign company into a formal process in England. It does not consider personal insolvency law, which will apply to individuals who incur business debts in their own name. In addition, it does not consider the manner in which the formal processes described in this book might differ if the company concerned is registered in Scotland or Northern Ireland. A number of other entities may be encountered, however, including: •

Partnerships or firms (the two terms are interchangeable). A partnership is ‘the relation which subsists between persons carrying on business in common with a view of profit’ (s 1 Partnership Act 1890). No special formalities are required to create a partnership. For administrative convenience and even for some legal purposes, it is often useful to treat a partnership as if it had an existence of its own, distinct from the individual partners. Nonetheless, a partnership has no separate legal personality in its own right. So far as an external creditor is concerned, the individual partners will each be liable without limit for the debts of the partnership.

•

Limited partnerships or ‘LPs’. An LP is formed in accordance with and is regulated by the Limited Partnerships Act 1907. Like an ordinary partnership it has no separate legal personality in its own right. However, a distinction is drawn between different types of partner. It must have at least one general partner, who will be liable without limit for the debts of the partnership. The other partners will be limited partners, who will merely be investors. Limited partners are precluded from taking part in the management of the partnership but their liability will be limited to the amount of their investment.

•

Limited liability partnerships or ‘LLPs’. An LLP is formed in accordance with and is regulated by the Limited Liability Partnerships Act 2000, as supplemented by the Limited Liability Partnerships Regulations 2001. An LLP does have a separate legal personality in its own right, and all of the LLP’s own assets will be available to its creditors. However, the liability of the individual members will be limited. So far as an external creditor is concerned, an LLP is therefore far more similar to a limited liability company than a partnership. An LLP is required to have at least two ‘designated’ members whose main role is to ensure that various requirements of the legislation are met.

•

Unregistered companies. In addition to all of the above, there may be other types of association or companies which are not registered under the Companies Acts. Some, like building societies, may have their own separate legislation in place of that contained in the IA 1986 which will not be discussed further here. Others may simply be regarded as ‘unregistered companies’ for the purposes of the IA 1986.

The following sections give a brief overview of the insolvency processes which are applicable to partnerships, LLPs and unregistered companies. 17

1.5  What are insolvency and restructuring?

1.5.2  Partnerships (including limited partnerships) The main piece of legislation here is the Insolvent Partnerships Order 1994 (SI  1994/2421). It will be necessary to identify which debts are debts of the partnership and which assets are partnership property, although this does not in itself preclude a creditor from also having recourse to the individual partners (or to the general partner in the case of an LP). The formal insolvency processes available under the Order are: •

Liquidation. The provisions of the IA 1986 which deal with the winding up of an insolvent company (see Section 1.4.2) also apply to a partnership in a slightly modified form. Partners are amongst the persons entitled to present a winding-up petition. However, the partnership can only be wound up by the court – there is no equivalent of voluntary liquidation available.

•

Administration. The provisions of the IA  1986 which deal with administration will also apply to a partnership in a slightly modified form. Since a partnership cannot grant a floating charge (other than an agricultural floating charge) over its assets, there should be no qualifying floating charge holder to consider. The administrator will need to be appointed by the partners out of court or failing that by court order. A  partnership cannot be placed into administration unless it is actually unable to pay its debts, which for these purposes bears the slightly modified meaning applicable to an unregistered company (see Section 1.5.4).

•

Partnership voluntary arrangement (‘PVA’). The provisions of the IA  1986 which deal with CVAs will also apply to a partnership in a slightly modified form. It is unnecessary that the individual partners enter into parallel individual voluntary arrangements or CVAs, although in practice they may well do so.

General and limited partnerships are not eligible for a Part A1 Moratorium. Certain provisions of the Company Directors Disqualification Act 1986 (CDDA 1986) apply where a partnership is wound up as an unregistered company. In general, however, the provisions of the IA 1986 described in Chapter 6 will not apply – they would have little practical relevance to a partnership, as the partners who are running the partnership business are concurrently liable anyway for partnership debts. Where a partner, including a general partner of an LP, is a company, however, it may be wise for its own directors to consider whether they might be liable as a result of these provisions through their directorships of that company.

1.5.3  Limited liability partnerships The main pieces of legislation here are the Limited Liability Partnerships Act 2000 and the Limited Liability Partnerships Regulations 2001 (SI 2001/1090). In keeping with the fact that an LLP is much more similar to a company than to a conventional partnership, the provisions of the IA 1986 and the IR 2016 which deal with CVAs, administration, receivership and liquidation will generally also apply to an LLP in only slightly modified form. The provisions of the IA 1986 which allow antecedent transactions to be set aside and which are described in Chapter 5 will generally apply. The provisions of the IA 1986 and CDDA 1986 which pose risks for directors and which are described in Chapter 6 will also generally apply to members of an LLP. In the latter respect, all members of 18

What are insolvency and restructuring? 1.5 the LLP are potentially subject to disqualification proceedings even if they are not a member of the LLP’s management board (Secretary of State for Business, Energy and Industrial Strategy v Geoghegan [2021] EWHC 672(Ch)). Furthermore, the Regulations introduce an additional s  214A IA  1986 which will apply where an LLP has gone into insolvent liquidation. This section applies to a person if: •

within the period of two years ending with the date of presentation of the winding-up petition or the members’ resolution to place the LLP into liquidation (as the case may be), that person was a member of the LLP who withdrew property of the LLP, whether in the form of a share of profits, salary, repayment of, or payment of, interest on a loan to the LLP or any other withdrawal of property; and

•

the liquidator proves to the satisfaction of the court that at the time of the withdrawal that person knew or had a reasonable ground for believing that the LLP was unable to pay its debts at the time of the withdrawal or would become so after the assets of the LLP had been depleted by that withdrawal taken together with all other withdrawals (if any) made by any members contemporaneously with that withdrawal or in contemplation when that withdrawal was made; and

•

the court is satisfied that that person knew or ought to have concluded that, after each such withdrawal, there was no reasonable prospect that the LLP would avoid going into insolvent liquidation.

In such a case, the court may order that person to make such contribution to the LLP’s assets as it thinks proper, up to the aggregate of all withdrawals made within the two-year period in question. In CR and RA Eade LLP [2019] EWHC 1673 (Ch), the first reported case on s 214A IA 1986, the court thought it proper to focus on the extent to which the members’ continued trading had caused losses to creditors during this two-year period when determining the contribution payable. The facts which a member ought to know or ascertain and the conclusions that that member ought to have reached are adjudged in the same way as for a wrongful trading action under s 214 IA 1986 (see Chapter 6).

1.5.4  Unregistered companies Under s  221  IA  1986, the English courts have the jurisdiction to wind up any unregistered company if: •

the company is dissolved, or has ceased to carry on business, or is carrying on business only for the purpose of winding up its affairs; or

•

the company is unable to pay its debts; or

•

if the court is of the opinion that it is just and equitable that the company should be wound up.

An ‘unregistered company’ means any association and any company other than a company registered in any part of the United Kingdom under the Joint Stock Company Acts or under the legislation (past or present) relating to companies in Great Britain (s 220 IA 1986). 19

1.6  What are insolvency and restructuring? For these purposes, an unregistered company is unable to pay its debts: •

in circumstances analogous to those set out in s 123 IA 1986 (see ss 222 and 224 IA 1986); or

•

if a debt remains unpaid after an action or other proceeding has been instituted against any member of the unregistered company for any debt or demand due from the unregistered company or from that member in their character as a member, the unregistered company has been given notice of this action in writing and it has failed to pay the debt or demand, or stay the action or indemnify the defendant to the defendant’s reasonable satisfaction against the action or proceeding and against all costs, damages and expenses to be incurred by the defendant because of it, within three weeks of service of the notice (s 223 IA 1986).

There are no separate provisions which allow an unregistered company to be placed into voluntary liquidation, administration or CVA, however. (In Re The Salvage Association [2003]  BCC  504, a creative interpretation of the predecessor to the current EU Insolvency Regulation was used to place the association into a CVA, but the legislation was subsequently amended to prevent future use of this route.)

1.6  RESTRUCTURING AS AN ALTERNATIVE 1.6.1  Who is involved in a restructuring? As noted previously, restructuring involves reaching an arrangement between the company, some or all of its creditors and (possibly) some or all of its other stakeholders. For these purposes, a stakeholder is anyone who has a financial interest in the outcome of the restructuring. Exactly who the stakeholders are will depend on the facts of each situation – often the first step in a restructuring negotiation will be to identify all of the stakeholders and their interests. Where a company, or group of companies, trades it will have many creditors. It will not be practicable in any but the simplest of cases to negotiate a compromise with all of them – therefore this is rarely attempted. Instead, it is likely that only certain creditors will be involved in the negotiations, leaving the rights of other creditors unaffected. In some cases, the largest creditors by value, for example, landlords of surplus premises occupied by the company, might be asked to compromise their claims. If the company has a defined benefit pensions scheme with a deficit, pensions aspects may play a part. In sophisticated groups of companies, however, it may well be that the only creditors involved in the negotiations are lenders and other finance creditors, on the understanding that all trade and other creditors will be unaffected by the restructuring and will continue to be paid in full. It is likely, nonetheless, that most negotiations will involve the shareholders. As explained in Chapter 2, shareholder claims would rank behind those of the creditors on a formal insolvency. The creditors are therefore unlikely to compromise their own claims whilst leaving shareholder value intact, unless the shareholders are prepared to inject further money themselves. In addition, many restructurings will involve creditors taking shares in exchange for part of their debt in a ‘debt for equity swap’, which cannot be achieved outside a formal insolvency process unless the shareholders are prepared to become involved. 20

What are insolvency and restructuring? 1.6

1.6.2  Consensual or non-consensual? Many troubled companies are able to agree a wholly consensual restructuring with the relevant creditors and other stakeholders concerned. However, certain of the formal processes described in Section 1.4 may still serve as mechanisms for achieving a non-consensual restructuring, where not all stakeholders are prepared to agree terms. For example: •

A CVA, Scheme of Arrangement or Restructuring Plan can be used to bind, or ‘cram-down’, a minority of dissenting unsecured creditors.

•

A pre-packaged administration or receivership can be used to circumvent the claims of dissenting shareholders or lower ranking creditors by transferring assets to a new company whose debt and capital structure reflect the desired outcome. In a sophisticated group of companies, where the primary financing arrangements are made with non-trading holding companies, this can be achieved without the formal insolvency of any trading subsidiary.

In practice, the availability of a non-consensual route will often serve as an effective negotiating tool in persuading dissenting stakeholders to adopt a consensual route.

1.6.3  Why choose restructuring? The company and its stakeholders might prefer a restructuring for a number of reasons, including the following: •

a restructuring is likely to preserve more value for creditors and shareholders than a formal insolvency process;

•

a restructuring allows the company and its stakeholders to agree almost any arrangement they wish, and is therefore necessarily more flexible than a formal process;

•

a consensual restructuring will not require the involvement either of the court or an insolvency officeholder, and could therefore prove less expensive and quicker to implement;

•

a restructuring is less likely to trigger defaults under the company, or group’s key contracts or licences which it needs to operate its business;

•

a restructuring is a private arrangement, which is less likely to attract publicity than a formal process; and

•

management will usually favour a route which avoids any company of which they are a director being placed into a formal insolvency process.

1.6.4  What are the prerequisites for a restructuring? Any successful restructuring will have certain prerequisites. Among other things: •

The company, or group, must have a viable underlying business. A restructuring would otherwise have no long-term benefit for the stakeholders.

•

A  sufficient number of key stakeholders must support the process. The non-consensual processes described in Section 1.6.2 are effective only to bind 21

1.6  What are insolvency and restructuring? minority stakeholders, or those stakeholders who (as matters stand) would not receive a significant return on a formal insolvency. •

The company, or group, must be able to continue to trade until the restructuring can be implemented. This may mean, for example, putting in place interim cash-flow arrangements, injecting new money into the company or group, or agreeing a temporary rescheduling of payments to creditors at the outset.

•

The other stakeholders must be able to work with management. It is possible that the stakeholders may be able to supplement or replace underperforming management, although if so they would probably need to do so early in the process.

If it seems clear that one or other of these prerequisites will not be satisfied, it may well be unrealistic to attempt a restructuring and a formal insolvency process may then be the most suitable option. A significant amount of preliminary work may need to be carried out to determine whether a restructuring can be achieved, as discussed further in Chapter 11.

22

Chapter 2

Who gets what?

2.1 INTRODUCTION 2.1.1  What happens on the liquidation of a company? On the liquidation of a company, insolvency law prescribes how its assets, or the proceeds following the realisation of its assets, are to be distributed. As was mentioned in Chapter 1, this is not covered comprehensively in any single section of the insolvency legislation, and it is therefore necessary to read a number of different sections alongside the common law to understand the respective entitlements of the various interested parties (see Bloom v Pensions Regulator [2013] UKSC 52 at para 39). The liquidation of a company is a form of collective execution by all of its creditors against all of its available assets. The resolution or winding-up order divests the company of its beneficial interests in its assets. These assets become a fund which the company then holds on trust to discharge its liabilities. The creditors have a right to have the fund administered by the liquidator in accordance with the insolvency legislation (see Ayerst v C & K (Construction) Ltd [1976] AC 167).

2.1.2  What if there is a secured creditor? The court explained in Buchler v Talbot [2004] 2 AC 298 (the ‘Leyland Daf’ case) that the above fund applies only to the company’s own property (ie its ‘free assets’). It does not affect the proprietary interests of others. Assets subject to security are regarded as forming a separate fund for these purposes. To the extent that the realisations from the secured assets prove insufficient to discharge the debt due to a secured creditor, that secured creditor might claim for any balance against the free assets, alongside all of the company’s other unsecured creditors. However, the unsecured creditors have no recourse to the secured assets, save to the extent that: •

there is a balance remaining after the secured creditor has been repaid; and/or

•

the legislation makes a proportion of the secured assets available to them.

In addition, the proceeds of certain actions by a liquidator will also be available to the unsecured creditors rather than to the secured creditors (see Section 2.2.2). Where a creditor holds fixed and floating charge security over all of the company’s assets, there may well be no remaining free assets. To avoid the injustice that this might create, a number of legislative provisions have been introduced to allow for some of the recoveries from the floating charge assets to be allocated towards the payment of unsecured creditors as well as towards certain insolvency-related 23

2.1  Who gets what? expenses. Only the remainder of those recoveries will be available to the floating chargeholder. Table 2.1 summarises the position on a liquidation where there is a secured creditor. Table 2.1 – Application of realisations from secured assets when the company is in liquidation (in descending order of priority)1 Fixed charge holder2 Prescribed fees and expenses of the official receiver and moratorium debts or priority premoratorium debts arising from a prior Part A1 Moratorium (s 174A IA 1986) Expenses of the winding-up (to the extent that there are insufficient ‘free assets’) (s 176ZA IA 1986)3 Preferential debts (to the extent that there are insufficient ‘free assets’) (s 175 IA 1986) Prescribed part (s 176A IA 1986) Floating charge holder Ordinary unsecured creditors (s 107 IA 1986 and s 143 IA 1986) Statutory interest (s 189 IA 1986) Non-provable liabilities Debts or other sums due from the company to its members in their capacity as members (s 74(2)(f) IA 1986)4 Members generally (s 107 IA 1986 and s 143 IA 1986)4 1 Essentially the same order of priority will also apply in other insolvency processes. 2 The specific expenses of realising a fixed charge asset may be deducted from the sale proceeds, but not the general expenses of a liquidation (or administration) – see the Leyland Daf case. 3 If the company has entered into administration, administration expenses will be deducted instead of (or if the administration is a precursor to a winding up as well as) expenses of the winding-up. 4 The company’s ‘members’ will usually be its shareholders.

2.1.3  Other formal insolvency procedures In practice, it is possible that a company will enter into an insolvency procedure other than liquidation – indeed, a company may enter into more than one insolvency process before its life ends, with the result that the proceeds of its assets will not necessarily be realised or distributed by any single insolvency officeholder. For example: •

an administrator (who has powers that a liquidator does not have in relation to secured assets) may realise assets and pay only the secured and other higherranking creditors and the prescribed part, and then hand any surplus over to a liquidator to distribute amongst the ordinary unsecured creditors; or

•

a receiver may be appointed over the secured assets of the company at the same time as the company is in liquidation, to allow the secured creditor (via its appointed receiver) to realise the assets subject to the security and distribute the proceeds to the secured creditor, whilst the liquidator realises any free assets for the general creditors.

Nevertheless, the underlying order of priority described in this chapter will remain the basis for determining where each creditor ranks vis-à-vis the other creditors. 24

Who gets what? 2.2 When a company enters into a CVA, it is theoretically open to creditors to agree any compromise between themselves they may wish, but even so the rights of certain creditors are still recognised. The ordinary unsecured creditors cannot agree a compromise which prevents a secured creditor from enforcing its security (unless the secured creditor agrees), or obliges a preferential creditor to accept a lower level of priority than it would otherwise enjoy.

2.2  WHAT WILL BE AVAILABLE TO THE CREDITORS? 2.2.1  The company’s property The term ‘property’ is widely defined in s 436 IA 1986, and includes: ‘money, goods, things in action, land and every description of property wherever situated and also obligations and every description of interest, whether present or future or vested or contingent arising out of, or incidental to, property’. A company’s property will therefore include, for example, a claim it has against a third party, or a beneficial interest in property held on trust for it. However, the following will not be available to a company’s creditors: •

Property which the company does not own, even though it may have possession of that property, or otherwise deal with it in some way. Creditors might therefore seek to take ‘commercial’ security by retaining title, or obtaining title outright, to assets of the company in order to keep that property outside of any insolvency regime affecting the company, as described in Section 2.3.3.

•

Property which the company holds on trust for a third party. A  company might, for example, protect customer deposits paid to it at a time when it fears that it might be in financial difficulty by placing them in a specially constituted trust account, as described in more detail in Chapter 6. However, the courts have it made clear that an agent which is contractually obliged to remit funds to its principal will not become a trustee of those funds for the benefit of the principal simply by virtue of the agent entering an insolvency process (Bailey v Angrove’s Pty [2016] UKSC 47). Absent any express trust, the principal is simply an unsecured creditor for the unpaid amounts which are due to it.

2.2.2  Proceeds of insolvency officeholders’ actions A distinction is also made for distribution purposes between: •

the proceeds of claims which the company would have been entitled to bring whether it had entered into a formal insolvency process or not (eg  a claim under an indemnity, a contractual claim, such as for the breach of a warranty, or a claim for a debt owed to the company); and

•

the proceeds of actions which only a liquidator or administrator can bring (eg an action seeking to set aside a transaction at an undervalue or to recover a preference, or an action against the directors for wrongful trading). 25

2.3  Who gets what? In the latter case, the proceeds of the action may not be available to the secured creditors, as discussed further in Chapter 5. In addition, a liquidator or administrator may be able to sell to a third party the company’s right to bring claims falling into both categories, as discussed further in Chapters 5 and 6 (and, indeed, this is often an effective way of still making money out of a claim where they have no funds to bring a legal action themselves).

2.3  SECURED CREDITORS 2.3.1  What is a security interest? A security interest is a right given to a party over an asset of a company to secure payment of a debt or performance of some other obligation by the company (or, in some cases, by a third party). English law recognises four main types of ‘legal’ security: the pledge, the lien, the mortgage and the charge. Their meanings under English law are described below, but note that these words often take different meanings in other jurisdictions. In the United States, for example, a ‘lien’ may be more akin to an English charge. • A  pledge involves the delivery of possession of an asset of the company to a creditor. Ownership of the property remains with company. The creditor is able to sell the pledged asset if the company then defaults in payment. Because of the requirement for possession, there must be a tangible item which can be delivered to the creditor, so pledges are used only where the creditor is able to take possession of the asset itself or of a formal document of title, such as a bill of lading. In practice, except in certain specialised types of transaction, pledges are seldom used. • A lien gives a person the right to retain possession of an asset of the company until money owed is paid. In practice it differs from a pledge in that the asset in question will have been initially deposited with the person in question for some purpose other than security for a debt. A lien may be created by common law, by statute or by contract. So, for example, a garage will hold a common law lien over a repaired car until the company pays money owed for those repairs. A lien does not normally confer a power to sell the asset in question, and the holder must rely upon the fact that their right to retain possession will eventually oblige the company to pay. However, a lien created by contract may expressly include an ability to sell. • A mortgage involves the transfer of ownership of an asset (often a property) of the company to the creditor by way of security for the company’s obligations. There is an express or implied implication that ownership will be re-transferred to the company once those obligations have been discharged. The company’s right to have ownership of the mortgaged asset returned to it is known as the ‘equity of redemption’. The company will retain possession of the property concerned and can continue to use it. However, the mortgage will include terms to prevent the company dealing with the property in various ways whilst it is subject to the mortgage. • A  charge involves an agreement between the company and the creditor by which a particular asset, or category of assets, is appropriated to the satisfaction of a debt. Unlike a mortgage, a charge does not transfer ownership, or indeed any other existing interest in the asset concerned, to the creditor. Instead, it 26

Who gets what? 2.3 creates a new interest in the asset concerned in favour of the creditor. The creditor will be able to resort to the asset in order to realise it, and to apply those realisations towards repayment of the debt. In the meantime, the charge attaches itself as an encumbrance on the asset, and may follow the asset into the hands of a third party. It is possible for a charge to attach even to future assets (ie assets which the company does not yet own at the time the charge is entered into). A charge may either be fixed or floating. A discussion of the different implications for a creditor in holding the other types of security described above is largely beyond this book, but for the purposes of determining where that creditor stands vis-à-vis the unsecured creditors they can be regarded as placing that creditor in essentially the same position as they would be if they held a fixed charge. It is the distinction between fixed and floating charges, and its implications, which is most important for present purposes, as explained in Section 2.3.7 below.

2.3.2  Validity of security There are a number of issues which may affect whether or not security taken by a creditor will in fact prove as effective as the creditor originally anticipated: •

The security must attach to the asset concerned (ie it must be properly created over that asset). This means, amongst other things, that an agreement to take security must comply with any formalities prescribed, that the asset concerned must have been sufficiently clearly identified in the agreement to take security and that the company must owe some obligation at the time of any enforcement to the person holding the security (although this obligation need not necessarily have existed at the time the security was taken).

•

The security must have been perfected (ie all steps which are required to be taken to ensure its validity against third parties have been taken). This might require taking possession of the assets concerned, or it might require registration of the security, or some other form of notice to be given. For example, under s 859H(3) CA 2006, the failure to register various types of charge created by a company within 21 days of their creation will result in those charges being void against a liquidator, administrator or any other creditor of the company.

•

The security must have priority under any relevant rules. Whilst each secured creditor is still likely to have priority over the ordinary unsecured creditors, their position vis-à-vis other secured creditors will also be relevant. A discussion of the rules determining priority is beyond the scope of this book. However, where secured creditors are aware of each other’s existence, they will often in practice document an order of priority amongst themselves, and sometimes also certain unsecured creditors, in an intercreditor agreement or deed of priority rather than rely on the statutory and common law rules (which are complex and can lead to uncertainty).

•

The security must be able to withstand attack by a liquidator or administrator as a transaction at an undervalue or preference, or as an invalid floating charge. The circumstances in which security might so be attacked are discussed further in Chapter 5. In practice, of course a creditor may often still take the view that it would rather take security and run the risk of it later being set aside than not take the security at all. It may, however, also be possible to structure matters in a way which reduces this risk. 27

2.3  Who gets what? •

The company must have derived corporate benefit from granting the security. This will be most relevant when the company has granted security in respect of the obligations of some other party. The directors of the company have a duty to act in what they consider to be the best interests of the company, and need to have properly concluded that they can justify giving security for the third party’s obligations from the company’s own perspective.

2.3.3  ‘Commercial’ security In addition to the types of legal security described above, there are various practical ways in which a creditor may improve its position. These include: •

Retention of title, whereby the company and a supplier agree that ownership of goods supplied will not pass to the company until the company has paid for the goods in question (and possibly other goods supplied by that same supplier as well), notwithstanding that the goods in question may already have been delivered to the company. This is discussed further in Chapter 10. (Consignment supply arrangements, where the ownership of the goods never passes to the company but the proceeds of sale are instead split by the company and the supplier, are a variation on this theme).

•

Factoring, where, instead of taking security over the debts of a company, a lender acquires outright ownership of the company’s interest in those debts and advances funds against an agreed percentage of the amount of those debts.

•

Set-off, where sums are owed both by the company to another person, and by the other person to the company. A creditor of an insolvent company would normally expect only to recover a fraction of the face value of the debt owed to them by the company. However, where set-off allows that creditor to achieve a reduction in the amount they themselves owe the company, this can make the debt more valuable to them. This is discussed further in Section 2.11.

•

‘Flawed asset’, where a debt only becomes payable to a company on fulfilment of certain conditions. Thus, monies in an escrow account might be prevented from ever becoming part of the company’s own assets in the event of its formal insolvency. This is discussed further in Section 2.7.3.1.

2.3.4  What is a fixed and what is a floating charge? A fixed charge attaches, or ‘fixes’, immediately to the assets charged, assuming those assets are capable of being ascertained. Its key feature is that it gives the creditor who holds the charge control over the asset concerned. A document attempting to create a fixed charge will not do so effectively unless it contains provisions preventing the company from disposing of the asset without the secured creditor’s consent. In practice, security documents will invariably also place other restrictions on the company. A floating charge, in contrast, initially ‘floats’ above a changing pool of assets rather than attaching directly to any of those assets. It was classically described by Romer LJ in Yorkshire Woolcombers Association Ltd [1903] 2 Ch 284 as having three main characteristics: •

it is a charge on a class of assets of a company both present and future;

•

that class of assets is one which, in the ordinary course of the company’s business would be changing from time to time; and 28

Who gets what? 2.3 •

it is contemplated that, until some future step is taken by or on behalf of those interested in the charge, the company may carry on its business in the normal way as far as it concerns that particular class of assets.

An obvious example of an asset class which will naturally be the subject of a floating charge will be stock held by a trading company. The treatment of other asset classes is discussed at Section 2.3.8.

2.3.5  What are the advantages of a floating charge? The practical advantage of a floating charge is that it allows the creditor to take at least some form of security over additional assets of the company without paralysing the company’s ability to run its business. The consent of the secured creditor will not be required every time the company wishes to dispose of assets subject only to a floating charge. In practice, a creditor will very often take fixed charges (or mortgages) over those assets where it is practicable to maintain the necessary level of control and a floating charge over any remaining assets. This will give the creditor ‘all-asset’ security, and a security document creating all-asset security in this way is often referred to as a debenture. As discussed further in Chapters 4 and 9, only a creditor which holds security over ‘all or substantially all’ of a company’s assets, and whose security includes a floating charge, will be able to: •

appoint an administrator to the company without the need to make an application to the court; or

•

appoint an administrative receiver over the assets of the company.

2.3.6  What is ‘crystallisation’? The fact that a floating charge gives the company the ability to dispose of the assets concerned without the secured creditor’s consent is a potential problem for the secured creditor. It needs a way to prevent the company disposing of the assets in question and leaving little of value in the company. The law does give some protection here. When certain events occur, a floating charge will crystallise (ie attach itself to those floating charge assets in existence at that point in time). Crystallisation will automatically occur at common law when: •

a winding-up order is made in respect of the company;

•

the company ceases to trade; or

•

a secured creditor intervenes to take control of some or all the company’s assets, either by taking possession directly or by appointing a receiver, administrative receiver or administrator.

The secured creditor and the company may additionally agree other events which will cause the floating charge to crystallise. The security document may provide for crystallisation to occur automatically, for example if a third party starts or attempts to start any distress or execution process against any of the charged assets. It will usually also allow the secured creditor to choose to crystallise its charge by express 29

2.3  Who gets what? notice to the company in a wider range of circumstances. However, as discussed in Chapter  7, during a Part A1 Moratorium a secured creditor is prohibited from giving any notice which would have the effect of crystallising their floating charge or imposing, by virtue of any provision of their charge, any restriction on the disposal of the company’s property (s A22 IA 1986). Crystallisation will prevent the company from disposing of those assets without the secured creditor’s consent. It may also enable the secured creditor to defeat some competing claims by a third party to those assets, for example, the charge might crystallise where the third party attempts to levy distress, etc. In this respect the practical effect is to turn the floating charge into something akin to a fixed charge. However, crystallisation does not mean that the secured creditor will then enjoy all of the legal advantages it would have enjoyed had it taken a fixed charge over those same assets at the outset. Section 251 IA 1986 defines the term ‘floating charge’ as a charge which, as created, was a floating charge. This will be relevant for all of the purposes described in Section 2.3.7.

2.3.7  Why is the distinction between a fixed and a floating charge important? There are a number of reasons a creditor holding a floating charge is in a less favourable position than a creditor holding a fixed charge over the same assets: • The remuneration and expenses of a liquidator or an administrator (and also certain other liabilities arising in an administration) are payable out of the proceeds of the realisation of those assets in priority to a floating charge holder (see Section 2.4). • The preferential debts are payable in priority to a floating charge holder (see Section 2.5). •

The ‘prescribed part’ will be deducted from the property which would otherwise remain available to the floating charge holder once the deductions referred to above have been made (see Section 2.6).

•

There is a risk that, if the company subsequently enters into administration or liquidation, the floating charge might be valid only to the extent that ‘new value’ has been provided by the floating charge holder (see Chapter 5).

•

A floating charge holder will rank behind another creditor who subsequently succeeds in taking a fixed charge over the same asset (although the inclusion in the security of a ‘negative pledge’ provision, ie an agreement by the company not to grant any further security without the existing creditor’s consent, can afford some protection) and it may simply be impractical for the company to grant the second creditor an effective fixed charge over assets which it would continuously need to dispose of and replace in order to trade.

2.3.8  Over which assets can a fixed charge be taken effectively? There are various classes of asset which would not normally be disposed of in the course of a company’s business. A secured creditor can therefore maintain a fixed charge, with a requirement that the company obtains the creditor’s consent before 30

Who gets what? 2.3 disposing of such assets, with little practical difficulty on the part of either the creditor or the company. Assets which would normally fall into this category include: •

freehold and leasehold premises;

•

shares in subsidiary undertakings;

•

intellectual property; and

• goodwill. In contrast, stock has already been mentioned as an asset which will by its nature change from time to time making it impracticable to take anything other than a floating charge. Due to the disadvantages of a floating charge, a creditor will often wish to take a fixed charge over as many assets as possible. However, in Agnew v Commissioners of Inland Revenue [2001] 2 AC 710 (the ‘Brumark’ case), which concerned the ability of a non-clearing bank to take an effective charge over a company’s book debts, the court emphasised that in deciding whether a charge is fixed or floating, it needs to consider more than just the way the parties have chosen to describe the charge in their security document. A two-stage process should be adopted: •

first, the terms of the parties’ security agreement should be reviewed to ascertain the rights and obligations which the parties intended to grant to each other in respect of the charged assets; and

•

second, once it has ascertained the parties’ intentions, the court should categorise the charge. As a matter of law, if the parties’ intentions were to grant each other rights in respect of the charged assets which are inconsistent with the nature of a fixed charge, then the charge will not be a fixed charge no matter how they have chosen to describe it.

There are therefore a number of asset classes where a secured creditor’s ability to maintain a fixed charge has come under close scrutiny by the courts. Examples of these include: •

Book debts. The ability of a creditor to take a fixed charge over this asset class has been repeatedly considered by the courts. It is now clear that where a company is able to collect debts due to it from its customers and to use the proceeds in the ordinary course of its business without further reference to the secured creditor, the secured creditor will only hold a floating charge regardless of how that charge may be described in the security document (Re Spectrum Plus Limited (in liquidation) [2005] 2 AC 680). As the court in Spectrum made clear, however, it is possible to take a fixed charge over book debts provided the company is genuinely limited in its ability to collect the debts and to deal with the proceeds. A method often chosen to achieve this is to arrange for the proceeds of the book debts in question to be paid into a ‘blocked’ account. To maintain a valid fixed charge the secured creditor must continuously review the position and give its express authorisation before any transfer can be made from this account into one of the company’s general trading accounts. It is therefore usually only practical for creditors to seek to take a fixed charge over an account from which the debtor will not need to regularly withdraw funds in order to make payments in the course of its trading.

•

Cash deposits. It is certainly possible to maintain a fixed charge over a sum of money placed into an account where the secured creditor exercises the 31

2.4  Who gets what? power to prohibit withdrawals from that account except in certain pre-agreed circumstances. This is often done, for example, where a landlord holds rent deposit monies. The practical difficulty is that the monies in question will not be available to the company for its general trading purposes. A charge over a current account is likely to be floating, because the secured creditor is unlikely to be regarded as having the degree of control needed to maintain a fixed charge, on the basis that the company will need to freely withdraw funds from the account. •

Plant and machinery. Again, it is possible to maintain a fixed charge over plant and machinery if the company obtains the consent of the secured creditor before dealing with such assets. Often this is achieved by reference to a preagreed list of the plant and machinery in question. However, if the company is able in practice to acquire, dispose of or replace its plant and machinery without specific reference to the secured creditor, then the charge may well just be a floating charge.

In practice, where it is clear that a company may be in financial difficulty, a secured creditor will often take additional security with the aim of creating a fixed charge over classes of assets which were previously subject only to a floating charge. The downside of doing so, from the company’s and the creditor’s perspective, will be the increased amount of time they will need to devote, respectively, to seeking and considering consents before dealing with assets. In addition, such additional security might be at risk of attack on one of the bases described in Chapter 5.

2.4  EXPENSES ASSOCIATED WITH THE FORMAL INSOLVENCY PROCESS 2.4.1 Overview The insolvency legislation gives priority status to the costs and expenses involved in the various different types of formal insolvency process. For convenience, it is useful to consider each of liquidation, administration and receivership here, as they all enjoy a similar priority status in relation to other creditors.

2.4.2  Part A1 Moratorium fees, expenses and debts 2.4.2.1  When do these have priority status? Certain fees, expenses or debts will have priority status where proceedings for the winding up of a company are begun before the end of the period of 12 weeks beginning with the day after the end of any Part A1 Moratorium (s 174A(1) IA 1986). While s 174A IA 1986 does not apply to an administration, as discussed in Section 4.8.2, if the company enters into administration within the period of 12 weeks beginning with the day after the end of any Part A1 Moratorium, the administrator must make a distribution in respect of moratorium debts and priority pre-moratorium debts (see Section 2.4.2.3) and must realise any property necessary to do so (para 64A Sch B1 IA 1986). Again, the administrator must make this payment ahead of various administration expenses and other priority payments discussed in Section 2.4.4 or any payment in respect of a floating charge. 32

Who gets what? 2.4

2.4.2.2  How does the Official Receiver benefit? Any prescribed fees or expenses of the Official Receiver acting in any capacity in relation to the company rank ahead of all other claims (s 174A(2)(a) IA 1986).

2.4.2.3  How do moratorium creditors benefit? Any moratorium debts or priority pre-moratorium debts also rank ahead of all other claims (s 174A(2)(b) IA 1986). Moratorium debts and pre-moratorium debts are defined in Part A1 IA 1986: •

pre-moratorium debts are debts or liabilities that have fallen due before or during the moratorium by reason of an obligation incurred before the moratorium (s A53(1) IA 1986); and

•

moratorium debts are debts or liabilities that fall due during or after the moratorium by reason of an obligation incurred during the moratorium (s A53(2) IA 1986).

‘Priority pre-moratorium debts’ are in turn defined in s 174A(3) IA 1986 to mean pre-moratorium debts: •

payable in respect of the monitor’s remuneration or expenses;

•

payable in respect of goods or services supplied during the moratorium;

•

payable in respect of rent in respect of a period during the moratorium;

•

payable in respect of wages or salary arising under a contract of employment as far as they relate to a period of employment before or during the moratorium (which is defined s A18 IA 1986 to include holiday pay, sums payable in lieu of holiday, sick pay and contributions to occupational pension schemes);

•

consisting of a liability to make a redundancy payment and that fell due before or during the moratorium; and

•

arising under a contract or other instrument involving financial services that fell due before or during the moratorium and which is not ‘relevant accelerated debt’, ie debt that fell due during the relevant period by reason of the operation of, or the exercise of rights under, an acceleration or early termination clause in that contract or instrument.

The reference to relevant accelerated debt was included to prevent finance creditors improving their priority status by accelerating debt that would otherwise have fallen due after the end of the moratorium. Nevertheless, s 174A IA 1986 remains a controversial addition to the legislation in that it may still improve the priority status of certain pre-moratorium debts compared to others.

2.4.3  Liquidation expenses 2.4.3.1  Where do liquidation expenses rank? Under s  115  IA  1986, the liquidation expenses are payable out of the company’s free assets in priority to all other unsecured claims, including those of preferential creditors, other than those discussed in Section 2.4.2. The liquidator must ensure that 33

2.4  Who gets what? they have set aside enough monies to cover them before paying any interim dividend and must pay any outstanding liquidation expenses before paying a final dividend (see Chapter 3). However, there is no obligation to delay their payment until the end of the liquidation and, in practice, the liquidator may well pay many of them on an ongoing basis if they have funds to do so. Over the years, the courts have reached different conclusions as to where liquidation expenses rank vis-à-vis a floating charge. However, under s  176ZA IA  1986, introduced following the decision in the Leyland Daf case, these expenses, so far as the free assets are insufficient to meet them, now have priority over the claims of any floating chargeholder. The ‘free assets’ will not for these purposes include the prescribed part (s 176ZA(2)(a) IA 1986).

2.4.3.2  What expenses will be liquidation expenses? Both s  115 and s  176ZA(4)  IA  1986 make it clear that references to liquidation expenses are ‘to all expenses properly incurred in the winding-up, including the remuneration of any liquidator’. Rule 6.42 IR 2016 lists these expenses in the order of priority in which they are payable. This is set out in full in Table 2.2, and as can be seen, many of these expenses rank in priority to the remuneration of the liquidator. Where the assets are insufficient to satisfy the liquidation expenses in full, the court has the power under s 156 IA 1986 to vary this order of priority. Only in exceptional circumstances, however, will it exercise its jurisdiction to give any part of the liquidator’s remuneration priority over expenses which would normally rank ahead of this (see Linda Marie Ltd (in liquidation) [1988] 4 BCC 463). Table 2.2 – Liquidation expenses (a)

expenses which are properly chargeable or incurred by the liquidator in preserving, realising or getting in any of the assets of the company or otherwise in the preparation or conduct of any legal proceedings, arbitration or other dispute resolution procedures, which they have power to bring in their own name or bring or defend in the name of the company or in the preparation or conduct of any negotiations intended to lead or leading to a settlement or compromise of any legal action or dispute to which the proceedings or procedures relate;

(b)

the cost of any security provided by the liquidator or special manager in accordance with the IA 1986 or the IR 2016;

(c)

the remuneration of the special manager (if any);

(d)

any amount payable to a person employed or authorised, under Chapter 2, Part 6 IR 2016, to assist in the preparation of a statement of affairs or of accounts;

(e)

the costs of employing a shorthand writer on the application of the liquidator;

(f)

any necessary disbursements by the liquidator in the course of the administration of the liquidation (including any expenses incurred by members of the liquidation committee or their representatives and allowed by the liquidator under r 17.24 IR 2016, but not including any payment of corporation tax in circumstances referred to in (i) below);

(g)

the remuneration or emoluments of any person who has been employed by the liquidator to perform any services for the company, as required or authorised by or under IA 1986 or IR 2016;

(h)

the remuneration of the liquidator, up to any amount not exceeding that which is payable under Sch 11 IR 2016;

(i)

the amount of any corporation tax on chargeable gains accruing on the realisation of any asset of the company (without regard to whether the realisation is effected by the liquidator, a secured creditor, or a receiver or manager appointed to deal with a security);

34

Who gets what? 2.4 (j)

the balance, after payment of any sums due under (h) above, of any remuneration due to the liquidator; and

(k)

any other expenses properly chargeable by the liquidator in carrying out the liquidator’s functions in the liquidation.

Liabilities originally incurred before the liquidation in respect of property which the liquidator retains for the benefit of the liquidation may also be liquidation expenses, at least so far as they relate to the post-liquidation period (Re Lundy Granite Co (1861) 6 Ch App 462). In Re Toshoku Finance (UK) plc [2002] BCC 110, the court rejected an argument that there is a degree of discretion as to which expenses might fall within the scope of this regime. It held that tax on a company’s post-liquidation income was a ‘necessary disbursement’ which must be paid as a liquidation expense. In Re MK Airlines Limited [2018] EWHC 540 (Ch) it was also made clear that these requirements only apply to a company’s own assets, so it is possible for a funder to provide monies on terms whereby it is only used to pay particular debts or to be used for other specified purposes, such as payment of remuneration. Section 2.4.4 discusses further cases in relation to administration expenses in which equivalent principles have been applied.

2.4.3.3  Litigation expenses Rules 6.44 to 6.48  IR  2016 contain special provisions in relation to litigation expenses. These are expenses which are properly chargeable or incurred in the preparation or conduct of proceedings which the liquidator is entitled to bring, either in the name of the company or in their own name, for the purposes of swelling the monies available to creditors, or for preserving, realising or getting in any assets of the company. Here, ‘proceedings’ includes not only legal actions but arbitration and dispute resolution procedures, or indeed negotiations intended to lead to a settlement or compromise of any such proceedings. The legislature was sympathetic to floating chargeholders’ concerns that a liquidator might be over eager to conduct litigation at their expense. Therefore a liquidator is generally only entitled to deduct litigation expenses from the floating charge assets if they have first obtained the consent of any preferential creditors or floating chargeholders who would receive less money were the deduction to be made. The liquidator does not, however, need consent for litigation expenses which do not exceed (or which, in the liquidator’s opinion, are not likely to exceed) £5,000. The liquidator can also apply to court for an order allowing the deduction of litigation expenses in various circumstances, for example, where the floating chargeholder concerned might be a defendant in the proceedings.

2.4.4  Administration expenses 2.4.4.1  Where do administration expenses rank? The administrator’s remuneration and expenses are dealt with in para  99 Sch B1  IA  1986. Perhaps slightly oddly, this provision considers the priority position where they have ceased to be the administrator. The former administrator’s remuneration and expenses are to be: 35

2.4  Who gets what? •

charged on and payable out of property of which was in the administrator’s custody immediately before he ceased to be administrator; and

•

payable in priority to any floating charge.

In practice, the administrator may well pay many of these expenses during the course of the administration if they have funds available. To the extent that they still remain unpaid at the end of the administration, however, they will enjoy the priority position indicated above.

2.4.4.2  What expenses will be administration expenses? Rule 3.51  IR  2016 lists those expenses which are administration expenses in the order of priority in which they are payable. This is set out in full in Table 2.3. In a similar fashion to the liquidation expenses, many of these expenses rank in priority to the remuneration of the administrator. Where the assets are insufficient to satisfy the administration expenses in full, the court again has the power under r 3.51(3) to vary this order of priority. Table 2.3 – Administration expenses (a)

expenses properly incurred by the administrator in performing the administrator’s functions;

(b)

the cost of any security provided by the administrator in accordance with the IA 1986 or the IR 2016;

(c)

where an administration order was made, the costs of the applicant and any person appearing on the hearing of the application whose costs were allowed by the court;

(d)

where the administrator was appointed otherwise than by order of the court, the costs and expenses of the appointor in connection with the making of the appointment and the costs and expenses incurred by any other person in giving notice of intention to appoint an administrator;

(e)

any amount payable to a person employed to assist in the preparation of a statement of affairs or statement of concurrence;

(f)

any allowance made, by order of the court, towards costs on an application for release from the obligation to submit a statement of affairs or statement of concurrence;

(g)

any necessary disbursements by the administrator in the course of the administration (including any expenses incurred by members of the creditors’ committee or their representatives and allowed for by the administrator under r 17.24 IR 2016, but not including any payment of corporation tax in circumstances referred to in (j) below);

(h)

the remuneration or emoluments of any person who has been employed by the administrator to perform any services for the company, as required or authorised under the IA 1986 or the IR 2016;

(i)

the remuneration of the administrator agreed under Part 18 IR 2016 and unpaid preadministration costs approved under r 3.52 IR 2016; and

(j)

the amount of any corporation tax on chargeable gains accruing on the realisation of any asset of the company (without regard to whether the realisation is effected by the administrator, a secured creditor, or a receiver or manager appointed to deal with a security).

Rule 3.51(2)(j) IR  2016 can be a major factor in some administrations, given that the capital gains on realising certain assets may be considerable. A  new tax period is deemed to start immediately before a company enters into administration. Historically, this has meant that pre-administration trading losses were not available 36

Who gets what? 2.4 to reduce gains in the administration period. The position is now improved for losses arising after 1 April 2017. These losses can generally be used to reduce gains in later tax periods, up to a £5 million annual profit allowance (applied on a group-wide basis, in the case of groups). Above the £5 million annual allowance, only 50% of profits can be sheltered by carried-forward losses, although there are more generous rules where the company ceases to trade. The courts now apply principles equivalent to those described in Section 2.4.3.3 in determining what ranks as an administration expense. Therefore, for example: • In Exeter City Council v Bairstow [2007] EWHC 400 (Ch), it was held that non-domestic rates imposed on a business property during its period of occupation by an administrator or liquidator would be payable as an expense of the administration or liquidation. • In Jervis v Pillar Denton Ltd [2014] EWCA Civ 180, the Court of Appeal held that, where an administrator or liquidator makes use of a leasehold property for the benefit of the administration or liquidation, rent due under the lease of that property is payable as an expense of the administration or liquidation but only for the period of use, and will be treated as accruing from day to day for that purpose, regardless of whether rent is payable in arrears or in advance and when it actually falls due. • In Bloom v Pensions Regulator [2013]  UKSC  52, by contrast, the Supreme Court made it clear that a financial support direction (FSD) made by the Regulator after the administration had commenced was not an administration expense. The critical question was whether the expense was incurred because of ‘something done in the administration’ rather than simply whether the liability fell due before or after the administration commenced.

2.4.4.3  Liabilities ranking in priority even to administration expenses Under para  99 Sch B1  IA  1986, sums payable in respect of debts or liabilities under contracts entered into during the course of the administration have ‘superpriority’ status. They are charged on and payable out of property of which the former administrator had custody immediately before they ceased to be administrator in priority to the administration expenses. This is an important protection for parties entering into contracts with an administrator who is continuing to trade a business. Liabilities to pay post-administration wages and salary arising under contracts of employment ‘adopted’ by the administrator are given this same super-priority status (see Chapter 9).

2.4.5  Receivership expenses 2.4.5.1  Where do receivership expenses rank? The position of an administrative receiver and a non-administrative receiver is dealt with in s 45(3) IA 1986 and s 37(4) IA 1986, respectively. When a receiver vacates office: •

their remuneration and any expenses incurred by them; and 37

2.5  Who gets what? •

any indemnity to which they are entitled out of the assets of the company

are charged on and paid out of any property of the company which is in their custody or under their control at that time in priority to any charge or other security held by the person by or on whose behalf they were appointed. The priority status of the indemnity will be important where the receiver has become personally liable on a contract, including as a result of having adopted a contract of employment (see Chapters 9 and 10).

2.4.5.2  What expenses will be receivership expenses? Unlike liquidation or administration, there is no prescribed list of receivership expenses. Thus, for example, neither rent on a pre-receivership lease (Re Atlantic Computer Systems plc (No 1) [1991] BCLC 606) nor rates (Brown v City of London Corpn; Re Sobam BV  [1996]  BCC  351) are generally receivership expenses. The creditors in question will enjoy no better status that the other ordinary unsecured creditors of the company.

2.5  PREFERENTIAL DEBTS In a liquidation, the company’s preferential debts are to be paid in priority to all other unsecured debts (s 175 IA 1986). So far as the free assets are insufficient to meet the preferential debts, they also have priority over the claims of the floating chargeholder. Preferential debts are given this same priority status in an administration (para 65 Sch B1 IA 1986), where possession is taken of assets subject to a floating charge by or on behalf of the floating chargeholder (s 754 CA 2006), and where a receiver is appointed under a floating charge (s 40 IA 1986). Preferential debts are in turn divided into two types: (i) ordinary preferential debts; and (ii) secondary preferential debts. Secondary preferential debts rank after the ordinary preferential debts and will not be paid until the latter have first been paid in full. Where there are insufficient assets to pay the ordinary preferential debts or, as the case may be the secondary preferential debts, in full, they rank pari passu among themselves. Note that where a postponement agreement simply provides for one creditor’s fixed charge to rank behind another’s floating charge, the result may be that the preferential debts then enjoy priority over both creditors (see Re Portbase (Clothing) Ltd [1993] Ch 388). However, the use of a more sophisticated postponement agreement (which, for example, prioritises realisations rather than security) can allow secured creditors to avoid this problem. The meaning of the terms ‘preferential debts’, ‘ordinary preferential debts’ and ‘secondary preferential debts’ is clarified in s  386  IA  1986. They are defined by reference to a list in Sch 6 IA 1986. Certain categories of preferential debt which once existed have now been abolished. The present categories of preferential debts are set out in Table 2.2. In practice, however, the most relevant categories for the majority of companies will be Category 5 and Category 9. In this regard: •

Category 5, entitled ‘Remuneration, etc of employees’, is discussed further in Chapter 10; and 38

Who gets what? 2.5 •

Category 9, entitled ‘Certain HMRC debts’, is designed to capture amounts which the company has collected from third parties on HMRC’s behalf but failed to pay over to it. For the purposes of the category, pay as you earn (‘PAYE’) and national insurance (‘NI’) will both be relevant deductions.

Table 2.4 – Categories of preferential debts Ordinary preferential debts Category 4: •

Any sum owed by the company to which Sch 4 to the Pensions Scheme Act 1993 applies (ie unpaid company contributions to occupational pension schemes and state scheme premiums) (para 8 Sch 6).

Category 5: •

Sums owed by the company to present or former employees in respect of unpaid remuneration in respect of the whole or any part of the period of four months before the relevant date, subject to certain prescribed limits (para 9 Sch 6).

•

Sums owed by way of accrued holiday remuneration in respect of any period of employment before the relevant date to a person whose employment by the company has been terminated (para 10 Sch 6).

•

Sums owed in respect of money advanced for the purposes of paying debts which, had they not been paid, would have fallen within para 9 or 10 of Sch 6 (para 11 Sch 6).

•

Sums ordered to be paid under the Reserve Forces (Safeguard of Employment) Act 1985, subject to certain prescribed limits (para 11 Sch 6).

Category 6 •

Sums owed by the company in respect of certain levies or surcharges for delay relating to the production of coal and steel (para 15A Sch 6).

Category 6A •

Sums owed by the company to the scheme manager of the Financial Services Compensation Scheme (‘FSCS’) under s 215(2A) of the Financial Services and Markets Act 2000 (para 15AA Sch 6).

Category 7 •

Sums owed by the company in respect of deposits to which the FSCS applies, up to any limit on the compensation payable under the FSCS to the person or persons to whom the deposit is owed (para 15B Sch 6).

Secondary preferential debts Category 8 •

Sums owed by the company in respect of deposits to which the FSCS applies which exceed any limit on the compensation payable under the FSCS to the person or persons to whom the deposit is owed (para 15BA Sch 6).

•

Sums owed in respect of deposits made through a non-UK branch of a credit institution authorised by the competent authority of the United Kingdom and which would have been eligible for compensation had they been made through a UK branch of the same institution (para 15BB Sch 6).

Category 9: •

Sums owed by the company at the relevant date to HMRC in respect of value added tax or a ‘relevant deduction’ (para 15D Sch 6). A deduction will be ‘relevant’ if the company is required by law to make that deduction from a payment made to another person and pay it to HMRC, that deduction is credited by HMRC against any liabilities of that other person and the deduction is of a kind specified in regulations under s 99(3) of the Finance Act 2020.

39

2.6  Who gets what?

2.6  THE PRESCRIBED PART 2.6.1  What is the prescribed part? Under s 176A IA 1986, where a company has gone into liquidation or administration, or where a receiver or provisional liquidator has been appointed, the liquidator, administrator or receiver (as the case may be) must set aside a prescribed part of the company’s net property for its unsecured creditors before distributing any balance to the holder of any floating charge over the company’s assets created on or after 15 September 2003. The company’s net property means ‘the amount of its property which, but for s 176A, would be available to meet the claims of the floating charge holder’ (ie the floating charge property which remains once the preferential debs have been paid). This requirement was introduced on the same date as the preferential status of various debts due to the Crown was abolished (see Section 2.5). It is generally regarded as allowing the unsecured creditors rather than the secured creditors to benefit from this latter change. However, the holder of a floating charge created before 15 September 2003 will enjoy something of a windfall (see Section 2.6.3).

2.6.2  What is the amount involved? The amount of the prescribed part is set out in the Insolvency Act 1986 (Prescribed Part) Order 2003 (SI 2003/2097), as amended in 2020, and is: •

where the net property does not exceed £10,000, 50% of that property; and

•

where the net property exceeds £10,000, 50% of the first £10,000, plus 20% of the property which exceeds £10,000, up to a maximum prescribed part of £800,000.

However, where the floating charge in question was created before 6 April 2020, and there is no other floating charge over any of the company’s assets created on or after 6 April 2020 which ranks equally or in priority to it, the previous maximum prescribed part of £600,000 will continue to apply (Insolvency Act 1986 (Prescribed Part) (Amendment) Order (SI 2020/211)). Where the realisations from a secured creditor’s security are insufficient to satisfy their total claim, leaving them with an unsecured claim against the company for any balance, they are not entitled to claim any part of the prescribed part (see Re Permacell Finesse Ltd [2008] BCC 208 and Re Airbase (UK) Ltd [2008] BCC 213). However, they will be able to do so if they surrender their security completely, as they will no longer then be a secured creditor (Re PAL SC  Realisations 2007 Ltd [2010]  EWHC  2850 (Ch)). Indeed, because a secured creditor is regarded as surrendering their security if they choose not to disclose that security in a proof of debt, they may conceivably then share in the prescribed part even if no deed of release has yet been provided (Re JT Frith Ltd [2012] EWHC 196 (Ch)).

2.6.3  When will the prescribed part not be set aside? There is no requirement to set aside a prescribed part before distributing to the holder of a floating charge created before 15 September 2003, nor does there seem to be 40

Who gets what? 2.7 an obligation on any chargeholder to set aside a prescribed part where it enters into possession personally or through an agent instead of appointing a receiver. In addition, the insolvency officeholder is not obliged to set aside the prescribed part where: •

the company’s net property is less than the prescribed minimum (currently set by SI 2003/2097 at £10,000) and the officeholder thinks the cost of making a distribution to unsecured creditors would be disproportionate to the benefits; or

•

section 176A is disapplied under the terms of a CVA, Scheme of Arrangement or Restructuring Plan; or

•

the court orders that s 176A be disapplied on the basis that the cost of making a distribution to unsecured creditors would be disproportionate to the benefits.

In Re Hydroserve Ltd [2008]  BCC  175, for example, the court disapplied s  176A where a prescribed part estimated at most to be £40,000 would have had to be divided amongst 126 unsecured creditors, and where all but £5,000 of this sum would have gone to four creditors within the company’s own group. However, in Re Courts Plc [2008]  BCC  917 the court held that it had no authority to make a ‘qualified’ disapplication order which would have allowed the officeholders to distribute only to those creditors who were owed more than £28,000. (The order had been sought on the basis that to include 260 smaller creditors in the distribution would reduce the benefit to all creditors of any distribution being made once the additional costs had been met.) In Re International Sections Ltd (in liquidation) [2009]  EWHC  137 (Ch), it was emphasised that courts should not be too ready to disapply s  176A just because the dividend would be too small. It should look at the benefits to the creditors as a body. This point was further emphasised by a Scottish court in Joint Administrators of Castlebridge Plant Ltd [2017] BCC 87. Whilst unsecured creditors in that case would only have received around 0.3p in the £ from the prescribed part, because the total sum to be distributed was substantial, and the costs of distributing were not disproportionate to the size of the fund, the court would not make an order to disapply the prescribed part. Consequently, even where the return to individual creditors may be relatively small, if the size of the fund itself is substantial the court will be unlikely to disapply s 176A.

2.7  ORDINARY UNSECURED CREDITORS 2.7.1  What are the consequences of a winding-up for the ordinary unsecured creditors? The winding-up of a company has a number of consequences for its ordinary unsecured creditors: •

They may no longer take their own action to obtain payment from the company, but must instead submit their claim in writing to the liquidator. This process is termed ‘proving’ for the debt.

•

They may, however, prove even for debts which are not already due and payable at the date the company enters into liquidation. Such debts therefore ‘accelerate’ as a result of the liquidation. 41

2.7  Who gets what? •

Their total provable debts rank pari passu with those of all other ordinary unsecured creditors.

As explained in Chapter 3, the term ‘debt’ has a wide meaning for these purposes. That chapter discusses in more detail when a debt is provable, the mechanisms by which unsecured creditors may prove in a liquidation or a distributing administration respectively, and the methods of calculating the sum provable when a debt is not already due and payable. However, the pari passu principle will be addressed here.

2.7.2  What is the pari passu principle? The insolvency legislation makes it clear that once preferential debts have been accounted for, the provable debts of company’s ordinary unsecured creditors rank equally between themselves in a liquidation or distributing administration (see s 107 IA 1986 in relation to a voluntary liquidation and r 14.12 IR 2016 in relation to a distributing administration and compulsory winding up). Where there are insufficient remaining recoveries to pay each of the ordinary unsecured creditors in full, therefore, each such creditor receives a dividend representing the same percentage by value of their total provable debt as that received by the other ordinary unsecured creditors. It is common to hear references to ordinary unsecured creditors each receiving a dividend of a certain number of pence in the pound. The pari passu principle is the most fundamental principle of English insolvency law. Prior to a company’s liquidation, even where the company is unable to pay its debts, an unsecured creditor may well be able to obtain and enforce a judgment for the sums due to it, or can simply exert commercial pressure on the company to pay up in full. The liquidation process removes that creditor’s ability to pursue its own claim ahead of those of other unsecured creditors. As seen in Chapter  4, an administrator is given a degree of additional flexibility under para  66 Sch B1  IA  1986, entitling them to make ‘duress’ payments to pre-administration creditors, for example. However, this power will be used in comparatively limited circumstances, and is an exception to the normal principle.

2.7.3  What arrangements might the court set aside to protect unsecured creditors? English insolvency law has no statutory equivalent to those provisions of US bankruptcy law which automatically invalidate contractual clauses that modify a company’s interest in a contract on its insolvency. There are various statutory provisions which give a liquidator or administrator the ability to challenge payments made to creditors and other arrangements made in the period before the start of a formal insolvency process. These are considered in Chapter 5. Otherwise, however, it has been left to the courts to use the common law to set aside arrangements which they consider to be out of step with insolvency law. Two distinct principles have emerged here: • the anti-deprivation principle; and •

the principle that parties cannot contract out of the pari passu basis of distribution (often referred to as ‘the rule in British Eagle’). 42

Who gets what? 2.7

2.7.3.1  The anti-deprivation principle The anti-deprivation principle was summarised by Neuberger J in Money Markets International Stockbrokers Ltd (in liquidation) v London Stock Exchange Ltd [2002] 1 WLR 1150 as follows: ‘there cannot be a valid contract that a man’s property shall remain his until his bankruptcy, and on the happening of that [event] go over to someone else, and be taken away from his creditors … [T]here is no doubt that this principle exists, and has been applied to defeat provisions which have that purported effect.’ However, he also observed that the case law was not entirely consistent, so it was not possible to discern a coherent set of rules which would enable one to assess in every case whether a provision falls foul of the principle. The principle has been examined further in a number of recent cases, including by the Supreme Court in Belmont Park Investments PTY Limited v BNY Corporate Trustee Services Limited and Lehman Brothers Special Financing Inc [2011] UKSC 38. Provisions which the courts have held to contravene this principle include: •

a clause whereby the owner of a patent was entitled to withhold a share of royalties (which would otherwise have been due to the company) upon the company’s insolvency in order to repay an existing debt owed by the company (Jeavons, ex parte Mackay (1873) LR 8 Ch App 643);

•

a clause in a building contract vesting a company’s building materials in the building’s owner upon the company’s liquidation (Re Harrison, ex parte Jay (1880) LR 14 ChD 19);

•

a clause which assigned the company’s main asset, a patent, to a third party should the owner company become insolvent for a price which merely reflected the cost so far paid by the company of securing patent protection rather than the value of the asset (Fraser v Oystertec plc [2004] BCC 233); and

•

a clause whereby the company’s right to an indemnity from another party would automatically terminate if the company went into insolvency proceedings (Folgate London Market Ltd v Chaucer Insurance Plc [2011] EWCA Civ 328).

Recent cases where the courts have held that the principle did not apply, however, include: • the Money Markets case. Here, the company was a member firm of the London Stock Exchange. It failed to honour its obligations, and as a result ceased to be a member and went into liquidation. It was obliged to surrender its share for no consideration if it ceased to be a member. This provision was held to be valid since the share was inseparable from membership and could have no independent value to the company’s creditors; •

Lomas v JFB  Firth Rixson Inc [2012]  EWCA  Civ 419. A  swap agreement provided that the payment obligations of the non-defaulting party were suspended, potentially indefinitely, if an insolvency event occurred in relation to the other party. These provisions were held to be valid, partly for the reasons discussed below;

• the Belmont case. The facts and the reasoning are set out in the box below; and 43

2.7  Who gets what? •

HM Revenue and Customs v The Football League [2012] EWHC 1372 (Ch). Here, the Football League’s articles of association stipulated that on a club’s insolvency the league could require it to transfer its share in the Football League, which gave it the right to membership of the league, to another person for a fixed price. The club would not receive any share of the income which the league held from the sale of television broadcast rights if it ceased to be a member before the end of the season, although in practice the Football League would make interim distributions of cash to clubs during the season. These provisions were held to be valid, for the reasons discussed below.

It is possible now to identify some general themes, particularly as a result of the judgment in the Belmont case. There must have been a deliberate intention to evade insolvency laws. It may be possible to infer this intention in some cases. In borderline cases, an important question is whether the parties are entering into a commercial transaction in good faith. This was an important factor in the Belmont case. It was also relevant in the Football League case, where the court was persuaded that that there was a commercial basis for removing a club’s membership of the Football League on its insolvency, since other clubs would otherwise be required to continue to deal with and play fixtures against that club despite the fact that it might have defaulted on its obligations to them. The principle will not apply if the deprivation results from an event other than the company’s insolvency. For example, some of the judges in the Belmont case took the view that, as an event of default first occurred on the bankruptcy of the company’s parent, the company was not being deprived of anything as a result of its own insolvency. The court may also be less inclined to invoke the principle where the substance of the arrangement is that, on the company’s insolvency, the property is assigned to a party who paid for it. In the Belmont case, Lord Collins was influenced by what he considered to be the real commercial substance of the arrangement between the parties. ‘Flawed asset’ arguments (see Section 2.3.3) might still be relevant here, on the basis that if a party only becomes entitled to property on condition that it is solvent, then it has no absolute right to that property and is not being deprived of it on its insolvency. It is on this basis, for example, that forfeiture rights in leases and licences have traditionally been treated as valid notwithstanding the anti-deprivation principle. A lease or a licence be may regarded as a limited interest in property which is qualified by various conditions, including solvency, rather than as an absolute interest. Lord Collins was keen to stress in the Belmont case that it was important to view substance over form in the above regard, otherwise the anti-deprivation principle could easily be undermined. Nonetheless, in the Football League case, the court was unwilling to find that the Football League’s practice of making interim payments to clubs meant that in practice the clubs had an immediate right to receive the monies it held. Although HMRC argued that the articles were a transparent device of drafting that purported to delay the creation of a legal liability and did not reflect the reality of the payment process, Richards J made it clear that it was not for the courts to rewrite the parties’ contracts in accordance with a wider anti-avoidance principle. A quid pro quo test might also be relevant. Where the insolvent party has performed its side of the bargain, the courts should be slow to deprive it of the property it received in return. Conversely, however, where the insolvent party can no longer do what it contracted to do, the courts might more readily uphold a clause depriving 44

Who gets what? 2.7 it of property. Briggs J found this line of reasoning attractive at first instance in the Firth Rixson case (his decision is reported at [2010] EWHC 3372 (Ch)), and it was endorsed by Lord Mance in the Belmont case. The principle does not apply to ‘protective trusts’. It seems that the only real justification for this is that protective trusts have been well established by their own line of case law.

Belmont Park Investments PTY Limited v BNY Corporate Trustee Services Limited and Lehman Brothers Special Financing Inc [2011] UKSC 38 Lehman Brothers Special Financing Incorporated (‘LBSF’) set up a special purpose vehicle (the ‘Issuer’). The Issuer issued a series of loan notes to a number of investors including Belmont Park Investments PTY Ltd (the ‘Noteholders’). The Issuer used the monies raised to acquire Government bonds and other secure investments (the ‘Collateral’). The Issuer also entered into a credit default swap agreement with LBSF under which LBSF would pay the Issuer the amounts due by the Issuer to the Noteholders in exchange for the payment by the Issuer to LBSF of sums equal to the interest received on the Collateral. The Collateral was charged by the Issuer in favour of the Trustee to secure both its obligations to the Noteholders under the terms of the loan notes and its obligations to LBSF under the terms of the swap agreement. It was agreed between the parties that in the absence of an event of default on the part of LBSF under the swap agreement the proceeds of sale of the Collateral would be paid to LBSF in priority to the Noteholders. However, on event of a default by LBSF, the priority for payment would be reversed and the Noteholders would be paid in priority to LBSF (the so-called ‘flip’). LBSF’s parent, Lehman Brothers Holdings Inc (‘LBHI’), and shortly afterwards LBSF itself, subsequently filed for bankruptcy protection in the United States. This was an event of default on LBSF’s part under the swap agreement, and as a result the Noteholders directed the Trustee to terminate this agreement. This in turn triggered the payment of certain ‘unwind costs’ due from the Issuer to LBSF. Because LBSF had defaulted, the Noteholders considered that the flip had occurred and that they were entitled to payment of the Collateral in priority to LBSF. The present proceedings were brought against the Trustee and LBSF to require the release of the Collateral to the Noteholders. However, LBSF contended that the flip was invalid as it breached the anti-deprivation principle by depriving LBSF of its priority position as a result of its insolvency. The High Court and the Court of Appeal ruled in favour of the Noteholders, and the matter duly reached the Supreme Court. Lord Collins explained that when assessing if a contractual provision falls foul of the anti-deprivation principle, the court should attempt to determine whether the commercial objective of the parties was to remove property from one party, if that party became insolvent. The court should not be quick to strike down a commercially legitimate transaction, entered into by the parties in good faith. 45

2.7  Who gets what? In this case, he considered that the Collateral had in commercial reality been provided by the Noteholders to secure what was in essence their own liability, albeit subject to terms which included the provision for LBSF to have priority until the flip occurred. There was no suggestion that the flip had deliberately intended to evade insolvency law. This was obvious from the wide range of noninsolvency circumstances which were also capable of being an event of default under the swap agreement. There was also evidence that the fact the Noteholders would have priority over the Collateral in the event of LBSF’s insolvency was a very material fact in obtaining the Triple A credit rating that in turn enabled the notes to be marketed by Lehman. The anti-deprivation principle did not therefore apply and the flip was valid under English law. It was also suggested that the anti-deprivation principle only applies to contractual provisions that directly link the loss of property to the insolvency of the entity concerned. Here, the Noteholders argued, an event of default first occurred on the bankruptcy of LBHI so the flip had already taken place by the time LBSF became bankrupt and the principle could not apply. Lord Collins and Lord Walker were prepared to dismiss the appeal on this ground as well. As a footnote to the above, it is worth noting that US bankruptcy courts considered the same question as part of LBSF’s bankruptcy proceedings and concluded that the flip was invalid under US law. It was a clause that modified LBSF’s interest in a contact as a result of a bankruptcy filing (an ‘ipso facto clause) which violated the US Bankruptcy Code. These provisions of the US Bankruptcy Code have no English law equivalent.

2.7.3.2  Attempts to contract out of the pari passu principle The case of British Eagle International Air Lines v Compagnie Nationale Air France [1975] 2 All ER 390, as outlined in more detail in the box below, provides an example of an arrangement not specifically intended to defeat insolvency laws but which has nonetheless been found to be incompatible with them. It remains possible, following the same logic as used in British Eagle, that, for example, clauses in contracts which try to divert sums from a sub-contractor directly to a main employer on a contractor’s insolvency could be successfully attacked. However, the British Eagle case remains controversial. Since the case was decided, IATA has modified its rules to make it clearer that it is contracting with airlines as principal, rather than just as agent for other airlines. In International Air Transport Association v Ansett Australia Holdings Limited [2008] 1  WLR  758, the Australian High Court, considering the new rules, chose not to follow British Eagle. The courts have also disapplied the rule where they considered that international comity so requires. In McGrath v Riddell, In re HIH  Casualty and General Insurance Ltd [2008] 1 WLR 852, the court was prepared to allow English provisional liquidators in an ancillary winding-up to hand over assets to Australian liquidators despite the fact that the rules governing distribution were different in Australia. The pari passu rule will not prevent a creditor from agreeing to subordinate its claim to those of other creditors (Manning v AIG Europe Ltd, sub nom SSSL Realisations (2002) Ltd) [2005] 1 BCLC 1). 46

Who gets what? 2.7 British Eagle International Air Lines v Compagnie Nationale Air France [1975] 2 All ER 390 Both parties, like various other airlines, were members of the International Air Transport Association (IATA). IATA operates a clearing system to provide a ‘netting’ mechanism for the settlement of debts and creditors where members provided services for each other. Under this mechanism, which was binding on IATA’s members, a net balance due to or from each member was calculated for each month and notified to members. Contractually, the members could not claim directly from each other, but could only claim sums due to them from IATA. When British Eagle went into liquidation, it owed money to a number of airlines. However, it did have a net claim against Air France. The liquidator pursued Air France directly. He contended that the IATA clearing system offended the pari passu rule because, under this system, the general body of British Eagle’s creditors would not benefit from the claim against Air France; only the airlines who were members of the system would benefit. The House of Lords (by a majority of 3:2) agreed with the liquidator that, in so far as the IATA clearing system effected a different procedure from the mandatory setting off procedure between debtors and creditors applicable to insolvent liquidation, it was contrary to public policy. The majority accepted that the IATA members had good business reasons for entering into these arrangements and had not considered how they might be affected by the insolvency of one party, but saw this as irrelevant. The dissenting House of Lords minority did not dispute the relevant principle of law. However, their view was that, once they joined the clearing system, the members were no longer debtors or creditors of each other at all, but were merely debtors and creditors of IATA. Such an arrangement would not offend the principle, as on this analysis no creditors of British Eagle would be paid preferentially.

2.7.3.3  How do the anti-deprivation principle and the rule in British Eagle differ? In many cases, it has been argued that the offending provisions fall foul of both the anti-deprivation principle and the rule in ‘British Eagle’. Indeed in some of the earlier cases (such as the ex parte Mackay case) it is absolutely not clear which principle the court was applying. However, recent cases, particularly the Football League case, have emphasised some of their differences. •

The anti-deprivation principle helps determine the size of the cake to be divided amongst the unsecured creditors. The rule in British Eagle helps determine the manner in which that cake will be divided amongst those creditors.

•

For the anti-deprivation principle to apply, there must have been an intention to remove property from a company on its insolvency. The rule in British Eagle will make void a contract whose effect is to contract out of the pari passu principle regardless of the parties’ intentions – it can therefore apply even to bona fide commercial arrangements made for reasons unconnected with insolvency. 47

2.8  Who gets what? •

The rule in British Eagle applies only to the distribution of assets belonging to the company at the start of insolvency proceedings (or coming into its ownership at a later date) whose purpose is to distribute assets to creditors. It cannot apply to assets which ceased to belong to the company before the start of those insolvency proceedings. In particular, administration will not fall into this category unless or until the administrator serves a notice that they intend to make a distribution. In contract, the anti-deprivation rule can potentially be invoked by a range of triggers for removing a company’s assets, provided they are insolvency-related – in the Oystertec case, for example, the trigger was a clause which sought to divest the company of the relevant asset if it became unable to pay its debts within the meaning of s 123 IA 1986.

2.8 INTEREST As will be seen in Chapter 3, outstanding interest on a debt in respect of a period prior to the date on which the company went into liquidation (or, if the liquidation was immediately preceded by an administration, from the date the company went into administration) is generally provable as part of the debt. Section 189 IA 1986 deals with interest for the period after the date the company went into liquidation. It provides that any surplus remaining after the payment of the debts proved in the liquidation shall, before being applied for any other purpose, be applied in paying interest on those debts in respect of the period for which they have been outstanding since the company went into liquidation. Rule 14.23 IR 2016 makes similar provision for a company which goes into administration. All interest payable under s 189 or r 14.23 ranks equally, regardless of whether or not the debts on which it is payable rank equally. Therefore, for example, no interest will be payable on preferential debts until the ordinary unsecured debts have first been paid in full. Such interest is payable at the ‘official rate’, which is the greater of: •

the rate specified in s 17 Judgments Act 1838 on the day the company went into liquidation or administration. This rate is currently 8% per annum; and

•

any rate of interest which is already applicable to that debt.

Because this rate of interest was so high compared to rates achievable elsewhere, this led to sales of unsecured claims in the administration of Lehman Brothers International (Europe) (‘LBIE’) at prices of well over 100p in the £. In Re Lehman Brothers International (Europe) (in administration) [2017] UKSC 38 (discussed in the box below), the Supreme Court found that, if LBIE moved from administration to liquidation without the administrators paying the statutory interest which had accrued on the unsecured debts during the administration, the interest would no longer be claimable.

2.9  NON-PROVABLE DEBTS A non-provable debt is a debt to a creditor which is not an expense of the liquidation or administration and which does not meet the criteria to be provable as an ordinary unsecured debt (see Section 3.10.2). It will therefore be payable only after all unsecured claims and interest on those claims has been paid in full. 48

Who gets what? 2.10 However, if it would be incompatible with other existing insolvency legislation to allow the creditor to recover that debt, the courts may hold that it is not recoverable at all, even as a non-provable debt. This is illustrated in Re Lehman Brothers International (Europe) (in administration) [2017]  UKSC  38, described in the box below.

Re Lehman Brothers International (Europe) (in administration) [2017] UKSC 38 The Lehman Brothers International (Europe) administration was unusual, in that there was a prospect of sufficient recoveries to produce a return for creditors with non-provable debts. That gave rise to a series of questions to the courts as to how certain types of claims would be treated. These ‘Lehman Waterfall’ cases culminated in a judgment of the Supreme Court. •

Statutory interest: the Supreme Court noted a lacuna in the predecessor to the current r 14.23  IR  2016. Were the administration to move into liquidation without the administrator paying the statutory interest which had accrued on the unsecured debts during the administration, the interest would not be claimable in a subsequent liquidation, even as a nonprovable debt. The Supreme Court held that it could not fill the lacuna. As r 14.23 IR 2016 mirrors its predecessor, this lacuna appears to remain.

•

Currency conversion claims: many of LBIE’s creditors were owed debts in a currency other than sterling. Given that claims are converted into sterling using the rate at the date LBIE entered administration, rather than the rate at the date of payment, creditors would suffer a ‘loss’ where the conversion rate at the earlier date was less favourable to them. Nonetheless, the Supreme Court held that there were no grounds for allowing a creditor to claim payment of such amounts, even as a non-provable debt, on the basis that doing so would go beyond the statutory regime relating to claims in foreign currencies set out in the predecessor to the current r 14.21 IR 2016 (see Section 3.10.6).

•

Subordinated loans: LBIE owed monies to its shareholders in respect of loans they had advanced to it for regulatory capital purposes. Those loans were expressed to be payable after the claims of all other creditors and were not to be repaid until all other debts outstanding at the time had been settled. The Supreme Court held that the wording contained in the agreements was sufficiently wide so as to rank these loans behind provable debts owed to unsecured creditors, statutory interest on those debts and even other non-provable liabilities.

2.10  DEBTS DUE TO MEMBERS IN THEIR CAPACITY AS MEMBERS Under s 74(2)(f) IA 1986 a sum due to any member of the company (in their character as a member) by way of dividends, profits or otherwise is deemed not to be debt of the company where the member would otherwise be in competition with other creditors, although such sum may be taken into account for the purposes of the final adjustment of the rights of the members between themselves. 49

2.11  Who gets what? In Soden v British & Commonwealth Holdings plc (in administration) [1998] AC 298, the House of Lords reviewed the relevant authorities and made it clear that s 74(2)(f) applies only where sums to which the member’s right is based on a cause of action on the ‘statutory contract’ between the company and its members or the right otherwise arises from the Companies Acts. Therefore, a debt representing dividend declared by the company but not yet paid will rank below the debts of the external creditors, and will not be paid unless and until the external creditors have first been paid in full. However, the following will not be subordinated: •

Outstanding loans made by the member to the company. (This contrasts with certain other jurisdictions where such loans are subordinated.)

•

Outstanding remuneration due to directors who are also members.

•

Damages awarded to a person who had bought the shares in a company from an existing member in reliance on the company’s misrepresentation (Soden).

The ‘contributory’ rule also applies in liquidations and prevents a contributory (ie a shareholder whose shares are not fully paid up) from proving for a debt in a liquidation until the member has discharged any liabilities it owes to the company in its capacity as a contributory. The ‘Lehman Waterfall’ judgment held that the rule also applies to a distributing administration (ie an administration in respect of which the administrator pays a dividend to unsecured creditors).

2.11 SET-OFF 2.11.1  What is the relevance of set-off when a company is insolvent? Set-off becomes relevant where sums are owed both by the insolvent company to another person, and by the other person to the insolvent company. Set-off will not increase the amount which that other person will receive from a formal insolvency process. However, it will increase the practical value to that person of the debt owed to them by the insolvent company. Without the operation of set-off, that other person would only receive a fraction of their debt from the insolvent company (if they receive anything at all), but they would still be liable to pay the company in full. If set-off operates, however, the amount which they owe to the company will be reduced by an amount equal to the amount of debt which the company owes to them. In this regard, it may be possible for a person owing money to a troubled company to acquire the benefit of a debt owed by that company to a third party at a fraction of its face value in order to benefit from a set-off, although certain limitations are imposed in this regard (see Section 2.11.3.3).

2.11.2  What are the types of set-off? The following are generally regarded as the types of set-off available under English law: •

Legal set-off. This is just a procedural defence by one party to a claim by another, requiring the creditor making that claim to obtain judgment only for any balance of their claim. It enjoys an advantage over equitable set-off in that the claim and the counterclaim need not arise out of connected circumstances. 50

Who gets what? 2.11 •

Equitable set-off. This can apply when the claim and the counterclaim arise from the same transaction, or are otherwise so closely connected that it would be inequitable for one claim to be enforced without giving credit for the other. However, it is otherwise much wider than legal set-off, as it is not just a procedural defence.

•

Contractual set-off. The parties involved may expressly agree the terms on which set-off will apply between them, or indeed the terms on which the forms of set-off described above will be excluded. The terms agreed between the parties are limited only to the extent that they cannot seek to exclude insolvency set-off, as described below.

•

Banker’s set-off. This is the right of a bank to set off a credit balance on one account against the debit balance on another. In practice, however, a bank will almost always extend this right by additional contractual provisions.

•

Insolvency set-off. A mandatory insolvency set-off regime will automatically come into being once a company enters into either liquidation or a distributing administration, and this regime will override any contrary arrangements which the parties have agreed between themselves. This is discussed further in Sections 2.11.3 and 2.11.4.

2.11.3  Set-off in liquidation 2.11.3.1  When will set-off apply? The special set-off rules will apply where, before the company goes into liquidation, there have been mutual credits, mutual debts or other mutual dealings between the company and any creditor of the company who is entitled to prove for a debt in the liquidation. An account is taken of what is due from each party to the other in respect of their mutual dealings, and the sums due from one party is set off against the sums due from the other (r 14.25 IR 2016). In this respect: •

the term mutual means due between the same parties, acting in the same capacities. Thus, if the company owes a debt to a party acting as trustee for someone else, this cannot be set off against a debt owed to the company by that party in its individual capacity (see Re ILG Travel Ltd [1996] BCC 21). For this purpose, different departments of the Crown are treated as if they were the same entity acting in the same capacity. Secretary of State for Trade and Industry v Frid [2004] 2 All ER 1042 (the ‘Frid’ case), the facts of which are set out in the box below, provides an example of ‘Crown set-off’;

•

the term dealings should be construed in a wide sense. In the Frid case it was held that ‘dealings’ were not confined to consensual dealings, but could extend to obligations imposed by statute, or a tort. However, a claim arising in tort for conversion has been held not to be one arising from a ‘dealing’ (Cosslett (Contractors) Ltd (No 2), Smith v Bridgend County Borough Council [2002] 1 AC 336); and

•

the courts have made it clear that this rule is mandatory, and therefore it cannot be excluded by agreement between the parties (National Westminster Bank Ltd v Halesowen Presswork and Assemblies Ltd [1972] AC  785), nor can the courts disapply it (Re Bank of Credit and Commerce International SA (No 10) [1997] Ch 213). 51

2.11  Who gets what? After set-off, only the balance (if any) of the amount owed to the creditor is then provable in the company’s liquidation. Alternatively, if the debt due to the company exceeds the debt owed by it to the creditor, the company is entitled to recover that balance. However, as would be expected, any part of the balance which results from a contingent or prospective debt owed by the creditor need only be paid if and when it becomes due and payable. In Bresco Electrical Services Ltd (in liquidation) v Lonsdale (Electrical) Ltd [2020]  UKSC  25 the counterparty argued that the fact that insolvency set-off replaced a claim and a cross-claim with a single claim for the net balance meant that the company no longer had a claim against it under a construction contact which was capable of adjudication. However, the Supreme Court held that the insolvency set-off regime did not deprive the company of a statutory right to refer a dispute to adjudication.

Secretary of State for Trade and Industry v Frid [2004] 2 All ER 1042 (the ‘Frid’ case) This case usefully illustrates several of the points on set-off discussed here. A  company went into liquidation. Its assets included a VAT credit of £7,185. Its liabilities included compensatory notice pay and redundancy payments due to employees. Under the relevant legislation, the Secretary of State for Trade and Industry (‘S of S’) was liable to pay these employees out of the National Insurance fund (‘NIF’) if the company failed to make those payments – the S of S duly paid the employees £11,574. The legislation provided that the S of S had a subrogated claim in the liquidation for the sum paid by it. Two other Crown departments also had claims against the company. HM Customs & Excise notified the liquidator that it proposed to allocate the VAT credit rateably between the three Crown departments and would set off £2,344 out of the £11,574 due to the S of S. The liquidator rejected this approach. The House of Lords held that: •

the term ‘mutual debts’ required no more than commensurable crossobligations between the same people in the same capacity;

•

that where there was a claim against HM Customs & Excise and a claim by the S of S on behalf of the NIF, the Crown was debtor and creditor in the same capacity; and

•

although the debt due to the S of S only became payable once it had paid the insolvent employer’s liability, it arose out of a (statutory) obligation which had existed before the date of the liquidation and therefore fell within the set-off regime.

Accordingly the set-off was allowed. (An important consideration in this case was whether a claim which was only contingent as at the date of the liquidation was available for set-off at all, although subsequent legislative changes would have made it unnecessary to determine this point had the case been heard today.) 52

Who gets what? 2.11

2.11.3.2  What debts are taken into account for these purposes? A sum is regarded as being due to or from the company for these purposes regardless of whether: •

it is payable at the present or in the future;

•

the obligation by virtue of which it is payable is certain or contingent; or

•

its amount is fixed or liquidated, or is capable of being ascertained by fixed rules or is a matter of opinion.

Where any obligation to or from the company, by reason of its being subject to any contingency or for any reason does not bear a certain value, its value may be estimated by the liquidator in accordance with r 14.14 IR 2016 (see Chapter 3). The debt must, however, be one which is provable (see the Frid case). Chapter 3 considers when a debt is provable. In this context a secured creditor is not required to set off monies owed to it by the company unless it elects to give up its security and prove for its debt (Re Norman Holdings Co Ltd (in liquidation) [1991] 1 WLR 10).

2.11.3.3  Excluded debts Certain debts are excluded from this mandatory set-off regime (r 14.25(6) IR 2016). These effectively fall into two categories. The first category comprises debts arising out of an obligation incurred after a certain point in time (for which see below). The second category comprises debts acquired by the creditor by assignment or otherwise pursuant to an agreement between the creditor and any other party which is entered into after a certain point in time (see below) regardless of when the debt was originally incurred. This is designed to prevent people who owe money to the company buying themselves a right of set-off when they know a liquidation or administration is already afoot, or pending. It is the date of the agreement to assign which is important here, not the date on which the assignment actually takes place pursuant to that agreement. A debt will thus be excluded if the obligation was incurred, or the agreement with the other party entered into (as the case may be): •

at a time when the creditor had notice that a decision had been sought from creditors on the nomination of a liquidator under s  100  IA  1986 or that a winding-up petition was pending (see Chapter 3);

•

where the liquidation was immediately preceded by an administration, at a time when the creditor had notice that an application for an administration order was pending or that a person had given notice of intention to appoint an administrator;

•

during an administration which immediately preceded the liquidation; or

•

after the company went into liquidation.

The word obligation means an obligation however arising, whether by virtue of an agreement, rule of law or otherwise. 53

2.11  Who gets what?

2.11.4  Set-off in administration A  statutory set-off regime similar to that described above also applies to an administration where the administrator has given notice that they propose to make a distribution (r 14.24 IR 2016). Here, a debt will be excluded if the obligation was incurred, or the agreement with the other party entered into (as the case may be): •

after the company entered into administration;

•

at a time when the creditor had notice that an application for an administration order was pending or that a person had given notice of intention to appoint an administrator;

•

where the administration was immediately preceded by a liquidation, at a time when the creditor had notice that a decision had been sought from creditors on the nomination of a liquidator under s 100 IA 1986 or that a winding-up petition was pending; or

•

during a liquidation which immediately preceded the administration.

In Kaupthing Singer & Friedlander Limited (in administration) [2010] EWCA Civ 518 the Court of Appeal considered the treatment of future debts for the purposes of set-off in an administration. Various customers who had deposits with the company had also been advanced loans which had not yet matured. Future debts owed both to and by a company in either a distributing administration or a liquidation would normally be valued in accordance with the formula set out in Section 3.10.7, but it became clear that that produced a distorted result in favour of customers with long loans. The Court of Appeal held that the debts owed by and to the company should be set off against each other at their value at the time of the distribution and, to the extent that a balance remained owing by the other party following the set-off, it should remain payable on its original maturity date at its non-discounted amount.

2.11.5  Set-off in other insolvency procedures Insolvency set-off does not apply to formal insolvency processes other than a liquidation or distributing administration (see Isovel Contracts Ltd v ABB Building Technologies Ltd [2002] 1  BCLC  390, a case concerning the ‘old’ administration regime). In particular, there are no special rules to deal with set-off in a CVA, and therefore notwithstanding that the debt due from the company to a creditor has been compromised, the company may still be able to recover any debt due to it from that creditor in full.

54

Chapter 3

Liquidation 3.1 INTRODUCTION Chapter 1 gave an overview of the liquidation process and explained the distinction between voluntary liquidation and compulsory liquidation, and between the two types of voluntary liquidation, members’ voluntary liquidation (‘MVL’) and creditors’ voluntary liquidation (‘CVL’). Chapter 2 considered the way in which a company’s assets will be distributed between its creditors on a liquidation. Chapter 6 will consider the duties of directors, including their duties after a company has gone into liquidation. This chapter now considers voluntary liquidation and compulsory liquidation in more detail, and in particular: •

the uses of each type of liquidation;

•

the method of commencement of each type of liquidation;

•

the powers and duties of a liquidator; and

•

the mechanisms by which unsecured creditors prove for their debts and a distribution is made.

3.2  WHAT ARE THE USES OF EACH TYPE OF LIQUIDATION? 3.2.1  Uses of an MVL An MVL is most likely to be used: •

where there is no perceived purpose in a company remaining in existence; and/ or

•

to allow members (who will normally be the company’s shareholders) to extract value from the company in circumstances where it is not possible to make a distribution to them under the relevant provisions of the Companies Acts.

An MVL may well be used, for example, as part of a restructuring or rationalisation of a group of companies with many subsidiaries. It is most likely to be considered as an alternative to dissolution of the company, rather than as an alternative to other formal insolvency procedures.

3.2.2  Uses of a CVL A CVL is most likely to be used: •

where the company is, or is likely to become, unable to pay its debts, and the members take the view that there is unlikely to be any value in preserving the company’s business; or 55

3.2  Liquidation •

immediately following an administration, as a distribution mechanism and/or to take advantage of a liquidator’s greater powers to pursue directors and other third parties.

A  CVL is most likely to be considered as an alternative to administration, or as the final remaining option where neither a restructuring of debt nor another formal insolvency process is likely to be possible. It is possible to use a CVL as a tool for eliminating a company where there is no perceived purpose in it remaining in existence but where the directors are unable or unwilling to swear a declaration of solvency. However, there are also certain disadvantages, as set out in Table 3.1. Table 3.1 – Disadvantages of CVL as opposed to an MVL •

In a CVL, the creditors rather than the members have the ultimate say in the choice of liquidator, and are subsequently the controlling force in the process.

•

The members may consider that allowing the formal insolvency of their company will generate negative publicity for them. In a CVL, the liquidation will be recorded as an insolvent liquidation at Companies House, so the process will become public.

•

Following a CVL, directors may well be required to disclose that they have been directors of a company which has entered into insolvent liquidation to the Financial Conduct Authority (where applicable) and/or when becoming involved with future business ventures.

•

The insolvent liquidation of the company may cross-default finance or other agreements elsewhere within the group of companies.

•

In an insolvent liquidation, the liquidator is obliged to submit a standard form report on the conduct of persons who are or have been directors of the company to the Department of Business, Energy and Industrial Strategy (BEIS) who will use it to consider whether directors’ disqualification proceedings are merited (see Chapter 6).

•

Restrictions under s 216 IA 1986 (the ‘Phoenix trading’ provisions) prevent persons who have been directors of the company during the 12 months prior to the insolvency from being directors, or concerned in the management, of any other company with the same or a similar name at any time during the following five years, subject to certain exceptions (see Chapter 6). There is, amongst other things, a risk that this may inadvertently affect persons who are directors of multiple companies within groups of companies.

3.2.3  Uses of compulsory liquidation Section 3.4 considers all of the situations where a winding-up petition can be presented, but a compulsory liquidation is most likely to occur where: • a creditor takes action to recover the debt due to it; or •

one or more creditors take action to convert a CVL into a compulsory liquidation because they are concerned that the liquidator in the CVL is giving insufficient scrutiny to the company’s affairs and possible actions against directors and other third parties; or

• the directors are concerned that the company is, or is likely to become, unable to pay its debts but are unable to persuade the members to place the company into a CVL, or •

the members wish to place the company into insolvent liquidation but are content for the Official Receiver to be appointed as liquidator.

In practice, a company is likely to allow itself to be placed into compulsory liquidation only where a restructuring of debt or other formal insolvency process 56

Liquidation 3.3 cannot be achieved, or where it concludes that there is no longer any benefit in saving the company. Table 3.2 looks at the advantages and disadvantages of a CVL compared to a compulsory liquidation. Table 3.2 – CVL versus compulsory liquidation Advantages of CVL: Commencement of process is quicker and more convenient. Private liquidator appointed from the outset. Members/directors have greater influence over the choice of liquidator. Less need for involvement for the court or Official Receiver. Disadvantages of CVL: Creditor concerns that the liquidator will give insufficient scrutiny to the company’s affairs and possible actions against directors and other third parties. Need for a members’ resolution means that directors themselves cannot instigate. Need sufficient assets in the company (or outside funding) to pay private liquidator’s fees.

3.3  COMMENCING A VOLUNTARY LIQUIDATION 3.3.1  Initial steps common to either type of voluntary liquidation Table 3.3 shows, in flowchart form, the voluntary liquidation process. There are a number of steps common to both an MVL and a CVL. •

The company would normally identify its proposed liquidator (although they are not obliged to do so – see below). The liquidator will be a partner or employee of a private sector firm. The proposed liquidator and their staff will usually guide the directors (and members) through the pre-commencement process as well. Because of the conflict of interest which might otherwise arise, a liquidator from the firm which has acted as the company’s auditors may not act as a liquidator in a CVL. However, the same absolute rule does not apply in the case of an MVL, and a liquidator from such a firm may prove a good choice due to the firm’s existing knowledge of the company provided there is no conflict – different firms may have different internal policies in this regard.

•

The directors hold a board meeting at which they resolve to recommend to the members that the company enter into voluntary liquidation, and to convene a meeting of the members if necessary. In the case of an MVL they will also resolve to make a statutory declaration of solvency.

•

The company must give advance written notice of the resolution to any qualifying floating charge holder (or ‘QFCH’) (s 84(2A) IA 1986). Chapter 4 explains the meaning of the term QFCH. The resolution may only be passed at the end of the period of five business days beginning with the day the notice was given, or if the qualifying floating charge holder so consents in writing. The requirement is more likely to be relevant for a CVL than an MVL. A court has also held that a failure to give this notice did not automatically invalidate the liquidation (Re Domestic and General Insulation Ltd [2018] EWHC 265 (Ch)). 57

3.3  Liquidation Table 3.3 – The voluntary liquidation process MVL

CVL

Directors hold board meeting to convene a members’ meeting and swear statutory declaration of solvency

Directors hold board meeting to convene a members’ meeting (no statutory declaration of solvency sworn)

Company gives at least 5 business days’ advance notice of the members’ meeting to any QFCH

Company gives at least 5 business days’ advance notice of the members’ meeting to any QFCH

Members’ meeting takes place. Liquidation commences by special resolution of members and members appoint liquidator

Members’ meeting takes place. Liquidation commences by special resolution of members and members appoint liquidator

Liquidator’s appointment advertised in the Gazette and notified to Registrar of Companies

Liquidator’s appointment advertised in the Gazette and notified to Registrar of Companies

Is the liquidator still of the view that the NO company can pay all its creditors in full in 12 months?

Directors (or existing MVL liquidator) seek a nomination of a liquidator from the creditors

Creditors’decision is made. If creditors’ choice of liquidator differs from members’, creditors’ choice prevails

YES

Liquidator gets in assets and distributes to creditors and members

Liquidator gets in assets and distributes to creditors (and members if sufficient assets exist)

Liquidator sends final account to members

Liquidator sends final account to members and creditors

Liquidator files final return with Registrar of Companies

Liquidator files final return with Registrar of Companies

Company is dissolved 3 months later

Company is dissolved 3 months later

58

Liquidation 3.3 •

At the members’ meeting, a special resolution must be passed to wind up the company (s  84(1)  IA  1986). A  resolution would normally also be passed to appoint the liquidator, although it is possible for the members to appoint the liquidator later or to leave the choice to the creditors in a CVL. It is normal also to include a resolution setting out the basis on which the liquidator’s fees will be paid and, if there are joint liquidators, to allow each to exercise the liquidator’s powers individually. Any appointed liquidator needs to provide a statement to the meeting that they are an insolvency practitioner duly qualified to act as a liquidator and that they accept the appointment.

•

The liquidator’s appointment takes effect once the members’ resolution is passed appointing them (s 86 IA 1986).

•

The company is required to give notice of the resolution in the Gazette within 14 days after its passing (s 85 IA 1986) and to register it at Companies House within 15 days (s 84(3) IA 1986).

3.3.2  Additional requirements for an MVL 3.3.2.1  The statutory declaration For a liquidation to be an MVL, the directors need also to make a statutory declaration of solvency before an English-qualified solicitor or their equivalent (s 90 IA 1986). The liquidation will otherwise be a CVL. The requirements for this declaration are set out in s 89 IA 1986. It must: •

be sworn by all or a majority of the directors;

•

state that the directors have made a full inquiry into the company’s affairs and that having done so they have formed the opinion that the company will be able to pay its debts in full (together with interest at the statutory rate) within the period stated in the declaration, which must not exceed 12 months from the commencement of the winding-up;

•

be made no more than five weeks before the members’ resolution is passed;

•

include a statement of the company’s assets and liabilities as at the last practicable date before the declaration; and

•

be delivered to the Registrar of Companies within 15 days.

This is not a declaration that the company is solvent. It is still possible for the directors to make this even where a company remains balance sheet insolvent, provided that it can still be sure of paying its debts. The route commonly adopted in practice is for the members(s), or another connected entity, to provide an indemnity to the company to the effect that, if the company’s assets transpire to be insufficient, they will make good the shortfall. Whilst contingent debts might be seen as a potential obstacle here, as discussed further in Section 3.12, a liquidator does have the ability to deal with these. The directors might discuss with the proposed liquidator how they would deal with any such debts in order to give the directors comfort in making their declaration. However, the declaration needs to be taken seriously. A director making the declaration who has no reasonable grounds for the opinion stated is liable to imprisonment or a fine, or both. Furthermore, if the debts, together with interest, are not paid in full 59

3.3  Liquidation within the period stated, there is a rebuttable presumption that the director did not have reasonable grounds.

3.3.2.2  Conversion to a CVL If, at any time during the course of an MVL, the liquidator still forms the opinion that the company will not be able to pay its debts in full plus interest within the period stated in the statutory declaration, they must make out a statement as to the affairs of the company and send it to the creditors within seven days (s 95 IA 1986). They must also then seek a nomination from the creditors of a person to be the liquidator going forwards by either: •

a decision procedure; or

•

the deemed consent procedure,

in either case stipulating a decision date not later than 28 days from the date on which they first formed the relevant opinion (r 6.11 IR 2016). The process of nominating a liquidator will then generally follow the same course as that described in Section 3.3.3. However, a virtual meeting is not the only available decision procedure here. The liquidator might alternatively choose one of the other decision procedures prescribed in r 15.3  IR  2016, ie  correspondence, electronic voting or any other decision-making procedure which enables all creditors who are entitled to participate in the making of the decision to participate equally. These other procedures are described further in Section 3.9.2.2. If the liquidator chooses a procedure other than a virtual meeting or the deemed consent procedure, they will need to deliver a notice to the creditors inviting them to make proposals for the nomination of a liquidator (r 6.12 IR 2016).

3.3.3  Additional requirements for a CVL In an MVL, the creditors need have no great involvement in the process beyond proving their debts, since they can expect to be paid in full. Since they have no similar expectation in a CVL, they are given a considerably greater say in the CVL process.

3.3.3.1  The creditors’ ability to nominate a liquidator In a CVL, the creditors are entitled to nominate their own choice of liquidator in place of that of the members if they so desire. The directors are obliged to seek the creditors’ nomination (s 100 IA 1986). Prior to 6 April 2017, every CVL required a physical meeting of creditors at the outset to allow the creditors to attend and vote, in person or by proxy. These meetings took various forms. Some were lively occasions, attended by many creditors. However, others were attended by only a couple of insolvency practitioners holding proxies for creditors, and frequently no creditors chose to attend at all. The default position is now for all creditors’ decisions to be made by procedures which avoid physical meetings. Sections 246ZE and 246ZF IA 1986 and r 15 IR 2016 60

Liquidation 3.3 provide a new decision-making framework which is designed to be equally applicable both to liquidation and to other formal insolvency processes. This is usually the most important occasion on which creditors will need to make a decision during the course of the liquidation, and Sections 3.3.3.2 to 3.3.3.5 will therefore describe the process involved in some detail. However, Section 3.9 then looks at how creditor decisions may be made later in the liquidation process. Insolvency practitioners will often still provide free advice to creditors involved in this initial decision-making process, whether by attending a meeting as that creditor’s proxy or otherwise, if they see a prospect of securing an appointment as liquidator for themselves.

3.3.3.2  Giving notice to the creditors The directors must deliver a notice to the creditors, seeking their decision on the nomination of a liquidator by either: •

the deemed consent procedure; or

•

a virtual meeting,

in either case stipulating a decision date not earlier than three business days after the notice is delivered but not later than 14 days after the date on which the windingup resolution was passed (r 6.14 IR 2016). Common practice, however, is to seek the creditors’ decision immediately after the members’ meeting, and therefore to deal with any notice requirements to creditors before the members place the company into liquidation. Rule 15.8  IR  2016 contains a list of general requirements for notices to creditors where a decision is sought by a decision procedure. Amongst other things, the present notice must state: •

by when the creditor must have delivered a proof of debt in respect of their claim (failing which, their votes will be disregarded);

•

in the case of a meeting, that any proxy given by a creditor to allow another person to vote on their behalf at that meeting must be delivered to the convener or chair of that the meeting before it may be used at that meeting; and

•

a statement that creditors who meet the thresholds in s 246ZE IA 1986 may request a physical meeting (as described further in Section 3.3.3.5).

The present notice then needs to state either the name of a qualified insolvency practitioner who, during the period prior to the decision date, will furnish creditors free of charge with such information as they may reasonably require concerning the company’s affairs or a place where, on the two business days prior to the decision date, a list of the names and addresses of the company’s creditors will be available for inspection free of charge (r 6.14(8) IR 2016). The notice also needs to invite the creditors to decide whether a liquidation committee should be established if sufficient creditors are willing to be members (r 6.19 IR 2016). The liquidation committee is discussed further in Section 3.9.2. Finally, the directors must deliver a copy of the statement of affairs referred to in Section 6.7.3.1 to the creditors not later than the business day before the decision 61

3.3  Liquidation date (r 6.14(7) IR 2016). Again, common practice is to deliver this at the same time as the notice to creditors. In Cash Generator Ltd v Fortune [2018]  EWHC  674 (Ch), the court held that the directors’ failure to send the notice to certain creditors did not invalidate the liqudator’s appointment but could still be a criminal offence on their part.

3.3.3.3  May the notice be delivered by email? Rule 1.45 IR 2016 makes it clear that a document may be delivered to a creditor by electronic means rather than by post if the intended recipient has: •

given actual or deemed consent for the electronic delivery of that document;

•

not revoked that consent before the document is sent; and

•

provided an electronic address for delivery of the document.

An intended recipient is deemed to have consented to electronic delivery by an insolvency officeholder where the intended recipient and the company had customarily communicated with each other by electronic means before the insolvency proceedings commenced. This is a useful provision, intended to make delivery of notices easier for companies that would rarely, if ever, now communicate by post. Given that the present notice is being given by the directors and not by an insolvency officeholder, however, cautious practitioners take the view that it does not fall within the scope of r 1.45 IR 2016 and that it should still be delivered to creditors by post where there is doubt as to whether they have given actual consent for electronic delivery.

3.3.3.4  The possible decision-making processes A  virtual meeting means any meeting where persons who are not invited to be physically present together may nevertheless participate in the meeting, including communicating directly with all of the other participants in the meeting and voting either directly or via a proxy-holder (r 15.2(1)  IR  2016). In addition to the more general requirements described in Section 3.3.3.1, a notice delivered to creditors must contain any necessary information as to how to access the virtual meeting, including any telephone number, access code or password required. However, once in progress, a virtual meeting will be procedurally similar to a physical meeting. Section 246A of IA  1986 sets out various more general provisions in relation to meetings where the attendees are not physically present together. It is, in particular, the duty of the convener to make appropriate arrangements: •

to enable those attending the meeting to speak and to vote; and

•

to ensure the identification of those attending the meeting and the security of any electronic means used to enable attendance.

The deemed consent procedure is set out in s  246ZF IA  1986 and requires the relevant creditors to be given notice of: •

the matter about which they are being asked to make a decision, in this case to choose the person who will be the liquidator; 62

Liquidation 3.3 •

the decision the person giving the notice proposes should be made, in this case the name of the person the directors propose;

•

the circumstances in which the decision will have been deemed to be made (or not made); and

•

the procedure for objecting.

If less than 10% by value of the creditors who would be entitled to vote object, then the directors’ choice of liquidator will be deemed to be made. If 10% or more in value do object, however, the directors will instead need to summon a physical meeting (s  246ZF(5)(b) IA  1986 and r 6.14(4)  IR  2016). Creditors must have submitted a proof of debt by the decision date in order to be entitled to object. The process of placing a value on creditor claims to determine which creditors can object is the same as that discussed in Section 3.3.3.6.

3.3.3.5  When is a physical meeting still required? The directors must still summon a physical meeting of creditors in place of any other procedure if any of: •

10% by value of the creditors; or

•

10% in number of the creditors; or

•

10 creditors,

make a request in writing that they do so (s 246ZE(3) and (6) IA 1986). For obvious reasons, this has become known as the ‘rule of 10’. The creditors must, however, make their request no later than five business days after the date on which the directors sent their notice to the creditors seeking their decision. When convening a physical meeting, the directors may still permit a creditor to attend that meeting remotely if they receive a request in advance to do so (r 15.6(6) IR 2016).

3.3.3.6  Voting and valuing claims for voting purposes Rules 15.20 to 15.35  IR  2016 set out the procedures for the calculation of voting rights, for determining when a resolution is passed and for virtual or physical meetings more generally. However, an overview of the procedures which apply to a liquidation is given here. The rules refer to the person who seeks the decision as the ‘convener’ and the person who presides over any meeting as the ‘chair’. Where the directors convene a meeting to seek the creditors’ nomination of a liquidator, the directors must appoint one of their number to preside over the meeting as chair. In practice, any existing liquidator is likely also to play a dominant role at the meeting. However, the meeting will give the creditors the opportunity to ask questions of at least one director, both on the statement of affairs and more generally. A resolution will be passed when a majority by value of those voting have voted in favour (r 15.34 IR 2016). When the vote concerns the appointment of a liquidator, and there are multiple candidates, however, the liquidator selected must have a clear 63

3.3  Liquidation majority over all of the others, and successive votes may need to be held (with the candidate receiving the fewest number of votes last time dropping out of the next vote) (r 6.18 IR 2016). A  creditor will only be entitled to vote if a proof of its debt and (if relevant) a proxy appointing its representative have been received by the convener no later than the decision date or, in the case of a meeting, by 4 pm on the business day before the meeting. However, in the latter case the convener or chair has a discretion to allow the creditor to vote notwithstanding non-compliance with this (r 15.28 IR 2016). A  creditor is entitled to vote on an unliquidated debt, or one whose value is unascertained, if the convenor or chair agrees to put upon it an estimated minimum value for the purposes of entitlement to vote and admit the claim for that purpose (r 15.31(2) IR 2016). In HMRC v Maxwell [2010] EWCA Civ 1379 (a case relating to a vote of creditors in an administration), the Court of Appeal indicated the chair must do their best to assess the minimum value of the claim. The chair also has a general discretion to accept or reject proofs although, in situations of doubt, the proper course is to mark the vote as ‘objected to’ and to allow the creditor to vote (r 15.33 IR 2016). The vote may subsequently be declared invalid if the objection is sustained. There is a right to appeal to the court against a convenor or chair’s decision and the court may make such order as it thinks just (r 15.35 IR 2016). As can be seen, the decision to accept or reject a proof for voting purposes is made on a comparatively ad hoc basis. It is not conclusive for other subsequent purposes, such as that of establishing the value of the claim for dividend purposes (Re Assico Engineering Ltd [2002] BCC 481).

3.3.3.7  How do proxies work? As noted in Section 3.3.3.2, a proxy will be required if a creditor wishes another individual to attend a virtual or physical meeting on their behalf. Rules 16.1 to 16.9 IR 2016 deal specifically with proxies. That proxy may direct the proxy-holder how to act at that meeting by giving specific instructions. This may be the creditor’s preferred approach where they wish simply to appoint the chair of the meeting as their proxy. Where the creditor’s own representative will attend, however, it may be wiser to submit a proxy that allows the representative to vote according to their discretion, as this allows for greater flexibility. It is possible also for a creditor to submit a blank proxy which contains neither the name of a proxy-holder nor instructions as to how the person will act, but containing a note to the effect that the proxy may be completed with the name of the person or the chair of the meeting who is to be proxy-holder (r 16.3 IR 2016).

3.3.3.8  What happens if the creditors nominate a different liquidator from the members? Should the creditors nominate a person other than the existing liquidator, any member, director or creditor is, in turn, entitled to appeal to the court within the seven days following the meeting for an order directing that the creditors’ choice of liquidator 64

Liquidation 3.4 is appointed jointly with the members’ choice, or appointing some person other than the creditors’ choice (s 100(3) IA 1986). Accordingly, a compromise will sometimes be reached as a result of a decision-making process where joint liquidators from two different firms are appointed, and the joint liquidator chosen by the creditors assumes particular responsibility for investigating the whereabouts of assets and the conduct of directors.

3.3.3.9  What happens during any interlude between the members’ meeting and the creditors’ decision? Under s 166 IA 1986, where a liquidator has been nominated by the company, the liquidator must not exercise their powers (without the permission of the court) prior to the creditors nominating a person to be liquidator, or that procedure concluding with a nomination being made, except: •

to take the company’s property into their custody or under their control;

•

to dispose of perishable goods, or other goods whose value is likely to diminish if not immediately disposed of; and

•

to do such other things as are necessary to protect the company’s assets.

This section, together with s  114  IA  1986 (see Chapter  6) therefore protects the creditors until they have had the chance to vote on their own choice of liquidator.

3.3.4  Conversion to a compulsory liquidation A voluntary liquidation does not prevent any creditor or contributory (or in certain circumstances the Official Receiver) from presenting a winding-up petition (see Section 3.4). The court may be inclined to make a winding-up order where circumstances suggest that an impartial investigation of the company’s affairs is required (Re Gordon & Breach Science Publishers Limited [1995] BCC 261).

3.4  COMMENCING A COMPULSORY LIQUIDATION 3.4.1  When does the court have jurisdiction to wind up a company? Table 3.4 shows, in flowchart form, the compulsory winding-up process. Under s122(1) IA 1986, a company may be wound up by the court if, amongst other things: •

the company has by special resolution resolved that it be wound up by the court (s 122(1)(a)); or

•

the company is unable to pay its debts (s 122(1)(f)); or

•

the court is of the opinion that it is just and equitable that the company should be wound up (s 122(g)).

The court has an overriding discretion as to whether to make a winding-up order and may refuse to do so if an alternative appears more appropriate. 65

3.4  Liquidation Table 3.4 – The compulsory liquidation process

3.4.2  Who can present a winding-up petition? Under s 124 IA 1986, a petition to wind up the company may be presented to the court by: • the company, or its directors; or • any creditor or creditors (including any contingent or prospective creditor or creditors – see Re Dollar Land Holdings [1994] BCLC 404); or • a contributory (subject to certain provisos, outlined in s 124 IA 1986); or 66

Liquidation 3.4 • a liquidator or temporary administrator (within the meaning of the EU Insolvency Regulation); or •

the designated officer of a magistrates’ court in the exercise of the powers conferred by s  87A  Magistrates’ Courts Act 1980 (enforcement of fines imposed on companies); or

•

all or any of the above parties, alone or jointly.

Other sections of the legislation also specifically allow the supervisor of a CVA, or an administrator or administrative receiver to present a petition in the name of the company. Finally, the Secretary of State can present a petition on public interest grounds (s 124A IA 1986).

3.4.3  When can a creditor present a petition? A creditor’s petition will almost always be on the grounds that the company is unable to pay its debts, although normal practice is for the petition also to contend, as a ‘catch-all’, that it is just and equitable that the company should be wound up.

3.4.3.1  Is it necessary to serve a statutory demand? The circumstances where a company will be treated as unable to pay its debts are set out in Chapter  1. There is an advantage to a creditor in serving a statutory demand (see rr 7.2 and 7.3  IR  2016) at the company’s registered office and then waiting three weeks before presenting a petition. Provided the debt is then neither satisfied nor disputed during that period, the company will be deemed to be unable to pay its debts without the need for the creditor to produce any further evidence of this to the court. There is nothing to prevent a creditor from presenting a winding-up petition on the basis of an undisputed debt due to them without first serving a statutory demand (Taylors Industrial Flooring v M & H Plant Hire (Manchester) Ltd [1990] BCLC 216). As noted in Chapter  1, the non-payment can in itself be treated as evidence that the company is cash-flow insolvent. The creditor need not then, in effect, extend an additional three weeks’ credit to the company. However, the risk of not first serving a statutory demand is that it remains far more likely that the company will still successfully be able to contend that the debt is disputed. In addition, a creditor whose real aim is to put pressure on the company should bear in mind that once a winding-up petition is presented it will not always be possible for the company to pay the debt.

3.4.3.2  When will the court restrain a winding-up petition? As a rule of general practice, the court will not make a winding-up order: •

when the debt is genuinely disputed on substantial grounds (Stonegate Securities Ltd v Gregory [1980] 1 Ch 576); or

•

where the company has a genuine and serious cross-claim for an amount which exceeds the petition debt (or which, if successful, would reduce the 67

3.4  Liquidation company’s net indebtedness below the ‘statutory minimum’ of £750) and which it has been unable to litigate (Re Bayoil [1998] BCC 988). The courts have made it clear that the presentation of a petition against a solvent company in the above circumstances is an abuse of process. The company may apply to the court to seek an injunction restraining a creditor from presenting a petition, or alternatively from gazetting a petition which has already been presented. Furthermore, the courts may penalise the company, and possibly even its legal adviser, in costs on an indemnity basis (see Re A Company (No 00751 of 1993), ex parte Avocet Aviation Limited [1992] BCLC 869). The courts have also granted an injunction restraining presentation of a winding-up petition where the contract under which the creditor alleged that the debt had fallen due contained an arbitration clause (Rusant Limited v Traxys Far East Limited [2013] EWHC 4083 (Comm)). They have stayed a petition which had already been presented on the same basis (Salford Estates (No  2) Limited v Altomart Limited [2014] EWCA Civ 1575). However, the courts have been unprepared to restrain a creditor simply on the basis that the company alleges that a dispute exists (Re a Company No 006685 of 1996 [1997] BCC 830) or where the opportunity to litigate the cross claim had not been taken (Southern Cross Group plc v Deka Immoblien Investment [2005] BPIR 1010). In addition, even where a dispute exists, the court may be prepared in exceptional circumstances to resolve that dispute itself (Lacontha Foundation v GBI Investments Ltd [2010] EWHC 37 (Ch)). The debt must be one which the creditor could otherwise have enforced, so a petition cannot be presented on the basis of a statute-barred debt (Re Karnos Property Co Ltd (1989) 5 BCC 14). However, once the creditor has obtained judgment there is no further such time limitation (Ridgeway Motors (Isleworth) Ltd v ALTS  Ltd [2005] BCC 496).

3.4.3.3  Do any temporary restrictions still apply? A number of temporary restrictions on the presentation of winding-up petitions were introduced in response to the Covid-19 pandemic. At the time of writing there is still a moratorium on a landlord presenting a petition in respect of ‘protected rent debts’ accrued between 21  March 2020 and 18  July 2021 if an arbitration between landlord and tenant pursuant to the Commercial Rent (Coronavirus) Act 2022 was initiated before 24  September 2022 and has not yet concluded. This is discussed further in Section 10.2.1. Otherwise, however, these temporary restrictions have now fallen away and are no longer of relevance to petitions presented after 1 April 2022.

3.4.4  What is the process for a winding-up petition? The process for petitioning to wind up a company is set out in full in rr 7.4 to 7.24 IR 2016. Two practice directions, Practice Direction: Insolvency Proceedings [2020] BCC 698 and Temporary Insolvency Practice Direction (No 5) Supporting the Insolvency Practice Direction [2021] BCC 877 are also relevant to this process. However, an overview of the process is given here. 68

Liquidation 3.4

3.4.4.1  Presenting the petition The petition is ‘presented’ by filing it with the court online using the court’s electronic working portal, a process known as ‘CE-filing’. The court will then issue sealed copies for service. In addition to the court fee for presenting the petition, the petitioner must pay a deposit, currently £2,600. This is designed to cover the basic costs of the Official Receiver should the company have too few assets to do so. This deposit is refundable if the petition is withdrawn or dismissed. When the petition is filed with the court, it will be endorsed with a hearing date. This might typically be six weeks from the date of issue. The issued petition must be served at the company’s registered office unless the company itself is the petitioner (para 2 Sch 4 IR 2016).

3.4.4.2  Notice of the petition Unless the court orders otherwise, notice of the petition must be given in the Gazette: •

not less that seven clear business days after it has been served; but

•

not less than seven clear business days before the date when the petition is due to be heard.

This notice brings the petition to the attention of the outside world, and invites notices from other creditors that wish to appear to support (or oppose) the petition, so it is a critical stage. Given the effect of s 127 IA 1986, as described in Chapter 5, a petitioning creditor whose purpose is to attempt to pressurise the company into payment may well refrain from giving this notice until as late as possible.

3.4.4.3  Can the petition be withdrawn? Under r 7.13 IR 2016, the court may order that the petitioning creditor has permission to withdraw the petition at any time up to five business days before the hearing, but must satisfy the court that: •

notice of the petition has not been given in the Gazette;

•

they have received no notice in support of, or opposition to, the petition; and

•

the company consents to such an order being made.

The petition can normally otherwise only be withdrawn at the hearing. In addition, even if the petitioning creditor no longer wishes to proceed, the court can substitute any supporting creditor who would have been entitled to bring a petition themselves as petitioner.

3.4.4.4  The court hearing Under s 125(1) IA 1986, at the hearing, the court may: •

grant the winding-up order;

•

dismiss the petition;

•

adjourn the hearing conditionally or unconditionally;

•

make an interim order; or 69

3.4  Liquidation •

make any other order it thinks fit.

However, the court may not refuse to make a winding-up order purely on the basis that the company’s assets have been mortgaged to an amount of or in excess of those assets, or that the company has no assets. In practice, the petition will normally be listed for hearing in a busy court alongside many other petitions. If it is unopposed, the order is likely to be made swiftly, provided that all of the correct papers are before the court.

3.4.5  Provisional liquidation Under s 135 IA 1986, at any time after the presentation of a winding-up petition, the court may appoint the Official Receiver or any other ‘fit person’ as a provisional liquidator pending the making of a winding-up order. Like a liquidator, any provisional liquidator must be a qualified insolvency practitioner. In theory, any person entitled to present a winding-up petition is entitled also to apply for the appointment of a provisional liquidator. However, given the serious consequences of such an appointment for the company, any person seeking such an appointment must in practice first convince the court that they are likely to obtain a winding-up order when the petition is heard. Once they have crossed this first threshold, the court will then go on to consider whether to make the appointment as a matter of discretion (HMRC v Rochdale Drinks Distributors Ltd [2011] EWCA Civ 1116). The application must make it clear that there is a need for interim control of the company pending a winding-up order, and that only an appointment will ensure that the status quo is maintained (Re Dry Docks Corporation of London (1888) 39 Ch D 306). In practice, the majority of applications will be made by creditors who believe that the company’s assets are in jeopardy and might be dissipated before the petition is heard by the court. In Re Namco UK  Ltd [2003] 2  BCLC  78 the court declined to make an appointment as it considered that this was not necessary to maintain the status quo. A useful summary of the principles to be applied when considering an application to appoint a provisional liquidator without notice to the company was provided in Revenue and Customs Commissioners v Winnington Networks Ltd [2014] EWHC 1259 (Ch). The provisional liquidator’s powers are conferred by the court order appointing them. The court has a general jurisdiction under s 135(4) IA 1986 in this regard, and may confer, for example, powers corresponding to those set out in Sch 4 IA 1986 (see Section 3.8.1). In practice, however, the court will typically give the provisional liquidators the powers they need to preserve assets, but not the power to distribute assets prior to the petition being heard. The moratorium on proceedings found in a compulsory liquidation also applies after a provisional liquidator has been appointed (see Section 3.5.4).

3.4.6  Who will be the liquidator? 3.4.6.1  The role of the Official Receiver When a winding-up order is made the Official Receiver becomes liquidator, and continues in office until some other person is appointed in their place (s 136(2) IA 1986). 70

Liquidation 3.4 If the company was previously in voluntary liquidation, the Official Receiver will replace the existing liquidator. Different rules apply, however, when the winding-up order is made immediately after an administration or a CVA, which may allow the existing administrators or CVA supervisor to continue as liquidator (s 140 IA 1986). The Official Receiver will advertise the fact that the company is in liquidation and notify the registrar of companies. They may require the directors to prepare a statement of affairs under s 131 IA 1986 (see Chapter 6). They have a duty to send a report to creditors and contributories with respect to the proceedings in the windingup and the state of the company’s affairs (r 7.48 IR 2016). The Official Receiver will in any event contact all creditors of whose addresses they are aware to invite them to submit a proof of debt (see Section 3.10).

3.4.6.2  Can the creditors change the liquidator? Often where a company has few or no assets no person other than the Official Receiver will be appointed. However, in other cases, creditors may wish to replace the Official Receiver with a private sector liquidator, who they may see as having a greater incentive to investigate and if necessary, to bring actions against third parties. A creditor, or group of creditors, who comprise at least one-quarter by value of the company’s creditors may at any time require the Official Receiver to seek nominations from the company’s creditors and contributories for the purposes of choosing another liquidator (s 136(5)(c) IA 1986). The Official Receiver also has a duty to decide within the period of 12 weeks after the order whether to seek nominations of their own motion. If they decide not to do so, they must give notice of their decision to the creditors and contributories (s 136(5) (a) and (b) IA 1986). Finally, the Official Receiver has the ability to apply to the Secretary of State for the appointment of another liquidator in their place. Indeed, they have a duty to do so if they have sought nominations as above, but no other liquidator has been chosen (s 137 IA 1986). In practice, the Official Receiver might apply to the Secretary of State where they can see that the company’s affairs merit investigation, and creditors might encourage the Official Receiver to form this view in appropriate cases.

3.4.7  The role of a special manager Where a company has gone into liquidation or a provisional liquidator has been appointed, the court may, on an application by the liquidator or provisional liquidator appoint any person to be the special manager of the business or property of the company. The liquidator or provisional liquidator may make such an application in any case where it appears to them that the nature of the business or property of the company, or the interests of the company’s creditors or contributories or members generally, require the appointment of another person to manage the company’s business or property (s 177 IA 1986). Once appointed, the special manager will have such powers as may be entrusted to them by the court. The court’s ability to entrust powers to the special manager includes an ability to direct that any provision of the IA that has effect in relation to the provisional liquidator or liquidator of a company shall have the same effect in relation to the special manager for the purposes of the carrying out by them of any of the functions of the provisional liquidator or liquidator. 71

3.5  Liquidation A compulsory liquidation with a concurrent appointment of a special manager has been used for a number of very large companies such as Carillion, British Steel and Thomas Cook which, for various reasons, would not have found a private insolvency practitioner willing to act as administrator. In each of those cases not only would an administrator have faced significant operational and funding risks but there were also public interest factors at play. In the case of Carillion, it was important that the company continued to provide a variety of public services until new providers could be found. In the case of Thomas Cook it was necessary to repatriate approximately 150,000 holidaymakers. In these cases, while the Official Receiver was appointed and remained the liquidator, the court also appointed private sector special managers from Big Four accountancy firms. These special managers could draw upon their own experience as insolvency practitioners and the resources of their firms but without taking the same risks as an administrator. At the time of writing, the most recent companies to see such an appointment were Virtual Infrastructure Group Limited and UKCloud Limited, providers of cloud computing services to the public sector.

3.5  WHAT ARE THE OTHER CONSEQUENCES OF LIQUIDATION? 3.5.1  What is the effect on the directors? The role of the directors in a liquidation is discussed further in Chapter 6.

3.5.2  The company’s business and status Once a company is in voluntary liquidation, it must cease to carry on business, except as may be required for its beneficial winding-up. It is a matter for the liquidator’s judgment as to when it remains beneficial to carry on the business. However, the corporate status and corporate powers of the company continue until the company is dissolved, notwithstanding anything to the contrary in its articles (s 87 IA 1986). In a compulsory liquidation, the liquidator may carry on the company’s business so far as may be necessary for its beneficial winding-up (s 167(1) IA 1986).

3.5.3  Transfers of shares in the company Once the company is in a voluntary liquidation, any subsequent transfer of shares or alteration in the status of the company’s members is void unless sanctioned by the liquidator (s 88 IA 1986). So far as a compulsory liquidation is concerned, any transfer of shares made after the date on which the winding-up petition is presented is void unless the court orders otherwise (s 127(1) IA 1986, as discussed further in Chapter 5).

3.5.4  Effect on proceedings In a compulsory liquidation, or where a provisional liquidator has been appointed, no proceedings or actions may be commenced or continued against the company or 72

Liquidation 3.5 its property except by leave of the court and subject to such terms as are imposed by the courts (s  130(2)  IA  1986). The underlying rationale for this is the pari passu principle, under which all claimants are expected to submit to the procedural scheme for proving claims in the winding-up. The court is likely to refuse leave if it considers that the issues in the action can be dealt with equally conveniently and less expensively in the winding-up. The court considered the nature and purpose of s 130(2) IA 1986 further in Financial Conduct Authority v Carillion Plc (in liquidation) [2021]  EWHC  2871 (Ch) and made it clear that the FCA did not require leave to issue statutory notices against the company and some of its directors in respect of market abuse and breaches of the Listing Rules. In deciding whether to grant leave, the court does, however, have a complete discretion to do what is right and fair in the circumstances (Re Aro Ltd [1980] Ch 196). For example, leave has been given where: •

the company is insured, and the insurer will fund the company to pay any judgment; and

•

the claim against the company involved issues common to a claim against third parties which is close to trial (New Cap Reinsurance Corp Ltd v HIH Casualty & General Insurance Ltd [2002] 2 BCLC 228).

In a voluntary liquidation there is no automatic stay of proceedings. The liquidator must make an application for a stay under their general powers to apply to the court: s 112 IA 1986. One court has suggested that the principles which should be applied are similar to those in a compulsory winding-up (Westbury v Twigg & Co [1892] 1 QB 77). Another has said that where it is largely just a question of determining quantum the court will normally grant such a stay, but that where the liability is being disputed the stay should normally only be granted in special circumstances (Currie v Consolidated Kent Collieries Corp Ltd [1906] 1 KB 134). The normal time limits for commencing proceedings under the Limitation Act 1980 stop running when a winding-up order is made, so a creditor does not have to commence proceedings to simply avoid losing their rights against the company (Re Cases of Taff’s Wells Ltd [1992] BCLC 11).

3.5.5  Effect on contracts Liquidation does not in itself terminate the contracts of a company. Contract of employment are a special case, however (see Chapter 10). The terms of the contract itself may of course provide that it automatically comes to an end on liquidation or, more normally, that the other party has the opportunity to terminate. However, such termination provisions will be subject to the provisions of s 233B IA 1986, as discussed further in Section 3.8.2. Alternatively, the company in liquidation may indicate that it is no longer able to perform its obligations under the contract, and the resulting breach will give the other party the ability to terminate and/or to prove for damages. However, the latter remedy may be of limited use against an insolvent company. The liquidator’s ability to disclaim onerous contracts will also be relevant here (see Section 3.6). 73

3.6  Liquidation

3.5.6  What is the effect on the company’s documentation? During any liquidation, every invoice, order for goods, business letter or order form (whether in hard copy, electronic or any other form) sent by or on behalf of the company is required to state that the company is in liquidation. All of the company’s websites must contain a similar statement. Either the liquidator or any officer of the company commits an offence if they knowingly and willingly authorise or permit a contravention of these requirements (s 188 IA 1986).

3.6 DISCLAIMER 3.6.1  When is a liquidator able to exercise a power of disclaimer? Under s 178 IA 1986, a liquidator may disclaim any onerous property. This section defines ‘onerous property’ to mean ‘any unprofitable contract, or any other property of the company which is unsaleable or not readily saleable or is such that it may give rise to a liability to pay money or perform any other onerous act’. This power is unique to a liquidator – administrators, for example, are not given any equivalent power. The underlying purposes of disclaimer are: •

to allow the liquidator to complete the liquidation without being impeded by continuing obligations under contracts or continuing ownership of other property which are of no value to the company; and

•

to avoid continuing liabilities in respect of onerous property which would otherwise be payable as liquidation expenses to the detriment of other creditors.

A  notice of disclaimer must be sent to various parties interested in the property. A copy must also be sent to the Registrar of Companies and, where the disclaimer is of registered land, to the Chief Land Registrar, as specified in more detail in rr 19.1 to 19.7 IR 2016. (There was once a requirement that a copy of the notice of disclaimer be filed in court, and that the court be kept updated regarding the disclaimer, but as a result of changes to the legislation, this is no longer a requirement.) Under s 179 IA 1986 any disclaimer of property of a leasehold nature does not take effect unless a copy of the disclaimer has been served on every underlessee and mortgagee and either: •

they have made no application under s 181 IA 1986 (see Section 3.6.4) before the end of the 14-day period beginning with the day on which the last such notice was served; or

•

where such an application has been made, the court directs that the disclaimer will have effect.

A liquidator must disclaim an entire contract if they exercise this power – they cannot simply disclaim the unfavourable terms of the contract.

3.6.1.1  What is an ‘unprofitable contract’? In Transmetro Corp Limited v Real Investment Limited Pty (1999) 17 ACLC 1314, the Supreme Court of Queensland reviewed the case law and set out a summary of 74

Liquidation 3.6 the principles to be extracted from prior authority to determine whether a contract was unprofitable: •

A contract is unprofitable … if it imposes on the company continuing financial obligations which may be regarded as detrimental to the creditors, which presumably means that the contract confers no sufficient reciprocal benefit.

•

Before a contract may be unprofitable [for these purposes] it must give rise to prospective liabilities.

•

Contracts which will delay the winding-up of the company’s affairs because they are to be performed over a substantial period of time and will involve expenditure that may not be recovered are unprofitable.

•

No case has decided that a contract is unprofitable merely because it is financially disadvantageous. The cases focus on the nature and cause of the disadvantage.

•

A contract is not unprofitable merely because the company could have made, or could make, a better bargain.

This summary was adopted in England in Re SSSL Realisations (2002) Limited (in liquidation) [2006] Ch 610, where the court held that a deed which subordinated a debt due to the company to a debt due to one of the debtor’s other creditors could not be disclaimed.

3.6.1.2  What is ‘property’ for these purposes? The meaning given to the term ‘property’ by the insolvency legislation is considered in Chapter 2. The courts have, for example, held a waste management licence to be property which may be disclaimed (Celtic Extraction Ltd v Bluestone Chemicals Ltd v Environment Agency [2001] Ch 475). The court in the SSSL Realisations case stated that for something to qualify as property, it must involve ‘some element of benefit or entitlement for the person holding it’. A deed which simply imposed a disability on the company did not fall into this category.

3.6.2  What is the effect of a disclaimer? Section 178(4) IA 1986 provides that a disclaimer operates to determine, as from the date of the disclaimer, the rights, interests and liabilities of the company in respect of the property disclaimed. Unless a vesting order is made by the court (see Section 3.6.4), disclaimed property vests bona vacantia in the Crown. However, it does not affect the rights or liabilities of any other person, except so far as is necessary for the purpose of releasing the company from any liability. As such, for example, if a lease is disclaimed, the company’s rights and obligations come to an end, but the liabilities of any guarantor continue (see Hindcastle Ltd v Barbara Attenborough Association Ltd [1997] AC 70).

3.6.3  When may a notice of disclaimer not be given? Under s 178(5) IA 1986 a notice of disclaimer shall not be given if a person interested in property has applied in writing to the liquidator requiring them to decide whether 75

3.7  Liquidation they will disclaim and the liquidator fails to do so within 28 days (or such longer period as the court may allow). This tends to be seen as a useful way of pressurising a liquidator into making an early decision. A  liquidator is also specifically prohibited from disclaiming certain contracts. These include a ‘market contract’ or contract effected by a ‘recognised body’ for the purpose of realising property provided as margin in relation to market contracts (s  164(1)  CA  1989) or a transfer order or a contract for the purpose of realising security in a payment and securities settlement systems (reg  16 of the Financial Markets and Insolvency (Settlement Finality) Regulations 1999).

3.6.4  What is the remedy of a party affected by the disclaimer? Under s 178(6) IA 1986, any person sustaining loss or damage in consequence of a disclaimer is deemed to be a creditor of the company to the extent of the loss or damage and may prove in the liquidation. In Re Park Air Services plc [2000] 2  AC  172, the House of Lords accordingly held that, following a disclaimer, a landlord’s claim was not for further rent but for statutory compensation, calculated as if the landlord was claiming damages under a contract which had been wrongfully terminated. They gave guidance on calculating the compensation in question. Under s 181 IA 1986: •

any person claiming an interest in the disclaimed property; or

•

any person under a liability in respect of the disclaimed property which has not been discharged by the disclaimer,

may apply to the court for an order vesting the disclaimed property in them, or their trustee. It seems that the interest involved must be a proprietary, and not merely a financial interest (Lloyds Bank SF Nominees v Aladdin Ltd (in liquidation) [1996] 1 BCLC 720, but cf Re Veldmay Ltd [1994] 1 BCLC 676). The legislation also makes further provision in relation to property of a leasehold nature (see s 182 IA 1986).

3.7  DUTIES OF THE LIQUIDATOR 3.7.1  What are the liquidator’s principal functions? The functions of the liquidator in a compulsory liquidation are to secure that the assets of the company are got in, realised and distributed to the company’s creditors and, if there is a surplus, to the persons entitled to it (s 143 IA 1986). The functions of a liquidator in a voluntary liquidation are not expressed in quite the same way (s 107 IA 1986 is the closest analogous provision), although in practice their functions are similar.

3.7.2  What are the liquidator’s specific duties? A liquidator has a number of specific duties stemming from the above functions, or from other specific statutory requirements. These include: •

In a compulsory liquidation, a duty to take under their control all of the property and other things in action to which the company is, or appears to be, entitled (s 144 IA 1986). 76

Liquidation 3.7 •

A  duty to investigate the affairs of the company (see, for example, Re Pantmaenog Timber Co Ltd [2004] 1 AC  158). In a compulsory liquidation the Official Receiver is under a parallel duty to investigate the causes of the company’s failure and generally the promotion, formation, business, dealings and affairs of the company, even if the Official Receiver is not the liquidator (s 132 IA 1986).

•

In a compulsory liquidation or CVL, a duty to keep and retain accounts (reg 10 of the Insolvency Regulations 1994 (SI 1994/2507)).

•

In a compulsory liquidation or CVL, a duty to report on directors’ conduct, as discussed further in Chapter 6.

•

In a compulsory liquidation, a duty to settle a list of contributories, ie  to determine which of the company’s shareholders are liable to contribute to the company in a winding-up (s  148  IA  1986 and r 7.79  IR  2016). (Under s 165(4) IA 1986, a liquidator in a voluntary liquidation may, but is not obliged to, do this.)

•

A  duty to determine and discharge the liabilities of the company (s  165(5)  IA  1986 for a voluntary liquidation, and s  148  IA  1986 and r 7.76 IR 2016 for a compulsory liquidation). This is discussed further in Section 3.10.

3.7.3  What are their other general duties? Liquidators must also observe certain more general duties when exercising their powers: •

A duty to avoid a conflict of interests between the liquidator’s own interests and the interests of those they are expected to protect, and to act impartially when there is a conflict of interests between different creditors or subsidiaries or indeed between different companies where they may have been appointed liquidator (see, for example, Re Rubber & Produce Investment Trust [1915] 1 Ch 382). In practice, the rules of the liquidator’s professional body may well also cover this area.

•

A duty to exercise skill and care in performing their duties (Windsor Steam Coal Company (1901) Ltd [1929] Ch 151).

•

In a compulsory liquidation, the liquidator, however appointed, is an officer of the court and thus under its control (s 167(3) IA 1986). As such the liquidator also has a duty, when exercising their powers, to act fairly and not merely to rely upon their strict legal rights. This principle derives originally from the bankruptcy case of Re Condon, ex parte James (1874) 9 Ch App 609 and is often referred to as the ‘rule in ex parte James’ – this rule is discussed further in Section 4.7.2.3. (A liquidator in a voluntary liquidation is not an officer of the court – Re T H Knitwear (Wholesale) Ltd [1988] Ch 275.)

3.7.4  What is the remedy for a breach of duty? If the liquidator fails to comply with their duties, an action can be brought against them under s 212 IA 1986 (described in Chapter 6). As a general principle, however, the liquidator does not owe duties to any individual creditor (see Hague v Nam Tai 77

3.8  Liquidation Electronics [2008] UKPC 13). It was suggested in A & J Fabrications Ltd v Grant Thornton [1999] BCC 807 that a liquidator might owe a duty to individual creditors as a result of a direct contract or where those creditors had suffered some special damage. Removal of a liquidator is discussed in Section 3.9.4.

3.8  POWERS OF THE LIQUIDATOR 3.8.1  What are the main powers of a liquidator? The main powers which a liquidator requires in order to allow them to carry out their duties are contained in Sch 4 IA 1986. (See s 165 IA 1986 for a voluntary liquidation and s 167 IA 1986 for a compulsory liquidation.) These are set out in Table 3.5. In Re Longmeade Limited [2016] EWHC 356 (Ch), a case where a liquidator in a compulsory liquidation proposed to pursue a claim notwithstanding the opposition of over 99% by value of the creditors, the court gave guidance on the approach a liquidator should take in exercising their powers. This is primarily a matter for the liquidator’s own commercial judgement, based on what they believe to be the best interests of the company and all those who have an interest in the estate. The liquidator may consult the creditors but is not obliged to do so. Whilst they should normally give weight to the reasoned views of the majority of the creditors, they may discount the views of creditors influenced by extraneous considerations. The court would not generally give directions or otherwise interfere. Table 3.5 – Powers of an English liquidator PART I 1

Power to pay any class of creditors in full.

2

Power to make any compromise or arrangement with creditors or persons claiming to be creditors, or having or alleging themselves to have any claim (present or future, certain or contingent, ascertained or sounding only in damages) against the company, or whereby the company may be rendered liable.

3

Power to compromise, on such terms as may be agreed: (a) a ll calls and liabilities to calls, all debts and liabilities capable of resulting in debts, and all claims (present or future, certain or contingent, ascertained or sounding only in damages) subsisting or supposed to subsist between the company and a contributory or alleged contributory or other debtor or person apprehending liability to the company; and (b) s ubject to paragraph 2 above, all questions in any way relating to or affecting the assets or the winding-up of the company, and take any security for the discharge of any such call, debt, liability or claim and give a complete discharge in respect of it.

3A

Power to bring legal proceedings under s 213, 214, 238, 239 or 423 IA 1986.

PART II 4

Power to bring or defend any action or other legal proceeding in the name and on behalf of the company.

5

Power to carry on the business of the company so far as may be necessary for its beneficial winding-up.

PART III 6

Power to sell any of the company’s property by public auction or private contract, with power to transfer the whole of it to any person or to sell the same in parcels.

78

Liquidation 3.8 7

Power to do all acts and execute, in the name and on behalf of the company, all deeds, receipts and other documents and for that purpose to use, when necessary, the company’s seal.

8

Power to prove, rank and claim in the bankruptcy, insolvency or sequestration of any contributory for any balance against their estate, and to receive dividends in the bankruptcy, insolvency or sequestration in respect of that balance, as a separate debt due from the bankrupt or insolvent, and rateably with the other separate creditors.

9

Power to draw, accept, make and indorse any bill of exchange or promissory note in the name and on behalf of the company, with the same effect with respect to the company’s liability as if the bill or note had been drawn, accepted, made or indorsed by or on behalf of the company in the course of its business.

10

Power to raise on the security of the assets of the company any money requisite.

11

Power to take out in their official name letters of administration to any deceased contributory, and to do in their official name any other act necessary for obtaining payment of any money due from a contributory or their estate which cannot conveniently be done in the name of the company. In all such cases the money due is deemed, for the purpose of enabling the liquidator to take out the letters of administration or recover the money, to be due to the liquidator themselves.

12

Power to appoint an agent to do any business which the liquidator is unable to do themselves.

13

Power to do all such other things as may be necessary for winding-up the company’s affairs and distributing its assets.

3.8.2  Power to require continuing supplies The provisions of the IA 1986 which protect contracts for the supply of goods and services in an administration are discussed in detailed in Section 4.9. The provisions of ss 233 and 233B IA 1986 apply equally where a company goes into liquidation or where a provisional liquidator is appointed. However, the provisions of s 233A IA (described in Section 4.9.3) do not apply to these processes.

3.8.3  Specific powers of investigation Certain specific powers are also granted to the liquidator under ss 234 and 236 IA 1986 to assist them in performing their investigative duties. Note the liquidator will also be assisted by the directors’ and employees’ duty to co-operate with the insolvency officeholder under s 235 IA 1986 (as discussed in Chapter 6). Although various of the same powers are also granted to an administrator, these powers, coupled with the powers described in Section 3.8.4, mean that liquidation is still a useful formal insolvency procedure for investigating and bringing claims to swell the assets of a company. The company’s creditors may also perceive a liquidator nominated by the creditors to be more independent than an administrator appointed by the company or its directors. In Re Hellas Telecommunications (Luxembourg) II SCA (in administration) [2011] EWHC 3176 (Ch), the court refused to allow the company to be dissolved at the end of its administration but instead ordered that it go into compulsory liquidation. When making the original administration order the court had also specifically sanctioned a pre-packaged sale to a specified buyer (see Section 4.12.7). As a term of the sale, that buyer had provided a €10 million fund to be used for certain purposes of the administration. The court noted, that despite the administrators’ use of part of this 79

3.8  Liquidation sum to fund investigations, they had not managed fully to clarify why the company had suffered such large and catastrophic losses. The court took the view therefore that, rather than being returned to the buyer, the balance of this sum should be retained to fund further investigations by the liquidator. The court outlined the additional powers which a liquidator had both to carry out investigations and to bring proceedings, albeit that an administrator was unable to bring wrongful trading or fraudulent trading proceedings under the legislation in force when that case was heard.

3.8.3.1  Getting in the company’s property Under s  234  IA  1986, where any person has in their possession or control and property, books, papers or records to which the company appears to be entitled, the court may direct that person to hand them over to the liquidator. This provision is commonly used, for example, to require firms of solicitors or accountants who have advised the company to hand over the files containing their advice, on the basis that these are company property. A company in difficulty should therefore be aware that advice they are being given may later be seen by a liquidator.

3.8.3.2  Inquiry into company’s dealings Under s 236 IA 1986, the court may, on the application of the liquidator, summon to appear before it: •

any officer of the company;

•

any person known or suspected to have in their possession any property of the company or supposed to be indebted to the company; or

•

any person whom the court thinks capable of giving information concerning the promotion, formation, business, dealings, affairs or property of the company.

The court may also require such a person to submit a witness statement verified by a statement of truth to the court containing an account of their dealings with the company or to produce any books, papers or other records in their possession or control relating to the company or its affairs. If a person summoned to appear before the court fails to do so without reasonable excuse, they may be liable to arrest or an order may be made for seizure of any books, papers, records money or goods in their possession. There is much case law on the operation of s 236 IA 1986. The court will only make an order for examination if it is necessary in the interests of the liquidation process and not oppressive or unduly unfair to the individual concerned (Embassy Art Products Ltd (1987) 3  BCC  292). However, even where the respondent is a third party, an application is not unreasonable simply because it is inconvenient for them, or may cause them considerable work, or make them vulnerable to future claims (British & Commonwealth Holdings plc (Joint Administrators) v Spicer & Oppenheim, Re British & Commonwealth Holdings plc (No 2) [1993] AC 426). There have been conflicting decisions on whether s  236  IA  1986 also has extraterritorial effect. In Re Akkurate Ltd (in liquidation) [2020] EWHC 1433 (Ch) the court considered these various decisions. It concluded that it did have the power to require persons resident in an EU  Member State, in this case Italy, to produce books and papers and an account of their dealings with the company. However, it also held that this jurisdiction derived from the predecessor to the current EU Insolvency 80

Liquidation 3.9 Regulation. Now that the United Kingdom has left the EU a future court may well hold that it no longer has the same jurisdiction. Under s 237 IA 1986, the court is given certain enforcement powers as a result of evidence obtained under s 236 IA. These overlap to a degree with s 234 IA 1986.

3.8.4  Powers to bring proceedings to swell the assets In addition to pursuing the company’s existing claims against third parties, the liquidator has the power to set aside transactions, as described in Chapter 5, and to pursue directors, as described in Chapter 6. The liquidator also has the power to assign various of these rights of action, as detailed further in Chapters  5 and 6. This provides another way of monetarising right of actions where it would be difficult for the liquidator to find funding to bring proceedings (s 246ZD IA 1986).

3.8.5  Joint liquidators More than one person is entitled to act as a liquidator (or provisional liquidator). The fact that there are two or more joint liquidators does not automatically mean that each liquidator needs to sign a document or authorise any other action for it to be effective. Provided the liquidator’s appointment or nomination so states, any act required or authorised to be done by the liquidator can be done by either one or more of any joint liquidators holding office (s 231(1) IA 1986). The usual practice is to have joint liquidators so that, if one is unavailable, another can act.

3.8.6  Consequence of agency The liquidator is the agent of the company. As such, a liquidator has the power to bind the company as its agent without personal liability (Stead Hazel Co v Cooper [1933] 1 KB 840). When executing documents during the liquidation, therefore the liquidator signs in the company’s name rather than their own name. However, as a matter of caution the liquidator will usually still include a provision excluding their personal liability and will therefore usually also be a separate party to the document in their own right solely to receive the benefit of this provision.

3.9  HOW ARE CREDITORS INVOLVED AND INFORMED? 3.9.1 MVL In an MVL, control remains with the members. The liquidator can call a meeting of the members at any time in the matter required by the articles of association or the Companies Acts, although it is rare that they will need to do so. If the liquidation continues for more than a year, at the end of the first 12 months (and at the end of each subsequent period of 12 months), the liquidator will need to send a progress report to the members and the registrar of companies, including a summary account of receipts and payments, details of the liquidator’s remuneration and expenses, and details of what remains to be done (s  92A IA  1986 and r 18.7 IR 2016). 81

3.9  Liquidation It is also the members who determine the basis of the liquidator’s remuneration (r 18.19 IR 2016), although in practice they are likely to do this when they appoint the liquidator at the outset and may well never need to revisit this.

3.9.2  CVL and compulsory liquidation 3.9.2.1  The liquidation committee In a CVL or compulsory liquidation, control lies largely with the creditors. As previously described, a liquidation committee may be set up to avoid the need for all creditors to continue to be involved in this process. Details of how the liquidation committee is formed and how it will then operate are set out in full in s 101 IA 1986 and rr 17.3 to 17.27A IR 2016. The committee will consist of between three and five creditors, and usually a representative sample of different types of creditor will be chosen. The liquidator must report to the committee on: •

the position generally in relation to the progress of the liquidation; and

•

any matters arising in connection with the liquidation to which the liquidator considers the committee’s attention should be drawn,

not less than once every six months (unless the committee agree otherwise). The liquidator must also deliver additional reports to the committee on the above matters and otherwise comply with requests for information as soon as reasonably practicable after being directed to do so by the committee, subject to certain limitations.

3.9.2.2  Decision making by the creditors When there is no liquidation committee, any decisions will need to be made by all of the creditors by way of one of the decision procedures prescribed in r 15.3 IR 2016 (other than a physical meeting), ie  correspondence, electronic voting, a virtual meeting or any other decision-making procedure which enables all creditors who are entitled to participate in the making of the decision to participate equally, or (where permitted) by the deemed consent procedure. The processes for a virtual meeting and for the deemed consent procedure have already been described in Section 3.3.3.4. Electronic voting includes any electronic system which enable a person to vote without the need to attend at a particular location to do so (r 15.2(1)  IR  2016). A notice delivered to creditors must contain any necessary information as to how to access the voting system, including any password required. Except where electronic voting is being used at a meeting, the voting system must be capable of enabling a creditor to vote at any time between the notice being delivered and the decision date. During the course of the vote, it must not provide any creditor with information concerning the vote cast by any other creditor (r 15.4 IR 2016). Whatever the procedure chosen, the creditors also have the right to convene a physical meeting, as described in Section 3.3.3.5. 82

Liquidation 3.9

3.9.2.3  Progress reports In addition to reports made to any liquidation committee and to the information about distributions described in Section 3.11, at the end of the first 12 months (and at the end of each subsequent period of 12 months), the liquidator will need to send a progress report to the creditors, the members and the registrar of companies including (amongst other things): •

a summary account of receipts and payments;

•

details of the liquidator’s remuneration and expenses; and

•

details of what remains to be done.

(Section 104A IA  1986 and r 18.7  IR  2016 for a CVL, and r 18.8  IR  2016 for a compulsory liquidation.) At the end of the liquidation process, the liquidator will also need to send out a final account, as described further in Section 3.13.1.

3.9.2.4  Opting out Creditors are entitled, if they so wish, to opt out of receiving notices from a liquidator. The liquidator is obliged, in the first communication with a creditor, to inform them in writing of their right to do so (s 246C IA 1986 and r 1.39 IR 2016). Opting out will not prevent that creditor from: •

receiving notice of a distribution or proposed distribution to creditors; nor

•

participating in a decision procedure or deemed consent procedure, even though (by virtue of being an opted-out creditor) they did not receive formal notice of it.

3.9.2.5  Determining the liquidator’s remuneration One of the main functions of any liquidation committee will, in practice, be to determine the liquidator’s remuneration. If there is no liquidation committee, however, the liquidator’s remuneration will instead need to be fixed by all of the creditors by way of one of the decision procedures described in Section 3.9.2.2. It is not possible for the liquidator’s remuneration to be determined via the deemed consent procedure. The basis of remuneration may be fixed: •

as a percentage of the value of the assets realised and/or distributed;

•

by reference to time incurred; or

•

as a set amount.

Where, as will most often be the case, the liquidator proposes to take remuneration by reference to time incurred, they will also need to provide a fee estimate and details of expenses which will or are likely to be incurred. The liquidation committee or creditors (as the case may be) will make an initial determination on the basis of this estimate (r 18.20 IR 2016). The liquidator will need to seek further approval before they are able to draw fees in excess of their initial estimate (r 18.30 IR 2016). 83

3.9  Liquidation A secured creditor or any unsecured creditor, either with the concurrence of 5% in value of the unsecured creditors (including itself) or the permission of the court, may make a written request to the liquidator for further information about remuneration or expenses set out in a progress report or final report (r 18.9 IR 2016). A secured creditor or any unsecured creditor, either with the concurrence of 10% in value of the unsecured creditors (including itself) or the permission of the court, may also apply to the court on the grounds that the basis fixed for the liquidator’s remuneration is inappropriate or the remuneration and/or expenses incurred by the liquidator are, in all the circumstances, excessive (r 18.34 IR 2016).

3.9.3  The role of the court In a compulsory liquidation, the exercise of the liquidator’s powers is subject to the control of the court generally. For example: •

any creditor or contributory is entitled to apply to the court with regard to their exercise or proposed exercise of the powers described in Section 3.8.1 (s167(3) IA 1986); and

•

any person aggrieved by any act or decision of a liquidator may also apply to the court seeking an order reversing or modifying that act (s 168(5) IA 1986).

Whilst there is no directly equivalent provision for a voluntary winding-up, a creditor or contributory will be able to invoke the general supervisory powers of the court under s 112 IA 1986. However, the court is reluctant to interfere with a liquidator’s decisions. In most situations, it will tend to do so only if the decision was taken in bad faith or it was so unreasonable that no reasonable liquidator could have taken it (see, for example, Tottenham Hotspur v Ryman, Re Edennote Ltd. [1996] BCC 718). In Re Edengate Homes (Butley Hall) Limited (in liquidation) [2022] EWCA Civ 626, the applicant, who was both a director and a creditor of the company, sought an order from the court under s 168(5) IA 1986 to reverse the liquidator’s assignment of a claim against her and her family to a litigation funder. She argued that they had not been given the opportunity to buy the claim and thus bring it to an end. However, the court held that she did not have the standing to seek such an order as she had no legitimate interest in the outcome – she was seeking to advance her and her family’s interests and not those of creditors generally.

3.9.4  Removal of the liquidator It is possible to apply to the court for the liquidator to be removed where the applicant can show that there is cause to do so (s 108(2) IA 1986 for a voluntary liquidation and see, for example, Re Keypak Homecare Ltd [1987] 3 BCC 558). Alternatively, the creditors may request that the liquidator convene a meeting for creditors for the purpose of seeking the liquidator’s removal. In Raithatha v Holstein [2017]  EWHC  3069 (Ch), a majority by value of the creditors had requested that the liquidator convene such a meeting. However, the creditors seeking the removal of a liquidator were themselves facing claims against them by the liquidator. At the liquidator’s request, the court directed that the meeting should not be held. The 84

Liquidation 3.10 court’s concern will be the proper operation of the process of the liquidation and justice as between all those interested in the liquidation. The court took a different view in Pagden v Soho Square Capital LLP [2022] EWHC 944 (Ch), an MVL where members against whom claims were already being brought had voted against the liquidators remaining in office. The court was influenced by the fact that, whereas in Raithatha the creditors wished to choose the replacement liquidators, in the present case the members were content for a neutral party such as the outgoing liquidators or the court to choose the replacements. The court was content not to disturb the outcome of the vote.

3.10  HOW DO UNSECURED CREDITORS RECOVER MONIES DUE TO THEM? 3.10.1  Proving in the liquidation As discussed in Chapter 2, once the company is in liquidation, unsecured creditors can no longer take individual action to recover the debts due to them. A creditor who wishes to recover their debt in a CVL or compulsory liquidation must submit a claim in writing to the liquidator(r 14.3(1) IR 2016). This is known as ‘proving’ the debt, and the written claim is known as a ‘proof’. There are a couple of exceptions to this: •

where the liquidation is immediately preceded by an administration, a creditor who has already proved in the administration is not required to submit a further proof in the liquidation (r 14.3(2) IR 2016); and

•

where the debt is a small debt, ie a debt of £1,000 or less, notice has already been delivered to the creditor of an intention to declare a dividend or make a distribution, and the creditor has not advised the liquidator that the debt is incorrect or not owed in response to the notice, that creditor will be deemed to have proved for purposes of determination and payment of the dividend (but not otherwise, eg for voting purposes) (r 14.3(3) IR 2016).

The full requirements of a proof are set out in r 14.4 IR 2016. The liquidator may call for any document or further evidence to be produced to them to substantiate the whole or any part of a claim.

3.10.2  What is a provable debt? Rule 14.2 IR 2016 indicates that all claims by creditors are provable as debts against the company, whether they are present or future, certain or contingent, ascertained or sounding only in damages. Rule 14.1 IR 2016 makes it clear that, when interpreting the legislation relating to a liquidation: •

the ‘relevant date’ means the date the company entered into liquidation (or, if the liquidation was immediately preceded by an administration, the date it went into administration);

•

the term ‘debt’ means any debt or liability to which the company was already subject at the relevant date and any debt or liability to which it may become subject after that date by reason of any obligation incurred before that date; 85

3.10  Liquidation • any liability in tort is a debt provable in the winding-up if either the cause of action has accrued at the relevant date, or if all of the elements necessary to establish the cause of action exist at that date except for actionable damage; •

it is immaterial whether the debt or liability is capable of being ascertained by fixed rules or as a matter of opinion; and

•

unless the context requires otherwise, ‘liability’ means (subject to the above) a liability to pay money or money’s worth, including any liability under an enactment, any liability for breach of trust, any liability in contract, tort or bailment, and any liability arising out of an obligation to make restitution.

In Haine v Day [2008]  BCC  845, the Court of Appeal rejected the liquidator’s argument that a protective award in favour of an employee (see Chapter 10) was not a debt provable in the liquidation on the basis the award had only been made after the liquidator has been appointed. The circumstances giving rise to the award had existed prior to the liquidation. Similarly, in Bloom v Pensions Regulator [2013]  UKSC  52, an administration case, a financial support direction issued by the Regulator after the administrators had already been appointed was held to be a provable debt. The Supreme Court considered the words ‘by reason of any obligation incurred before that date’, which had also been used in the predecessor to r 14.1 IR 2016. It held that the state of affairs which had existed prior to the administration was sufficient in that case to equate to the ‘incurring of an obligation’. The facts of this case are discussed further in Section 11.8.2.4.

3.10.3  What debts will not be provable? There are certain debts which are nonetheless not provable. These include: •

debts which are statute barred (see Re Joshua Shaw and Sons Limited (1989) 5 BCC 188);

•

secured debts (see Section 3.10.4); and

•

claims which are otherwise not provable as a matter of public policy. Foreign tax debts are a historic example of this (see Government of India v Taylor [1955] AC 491, QRS 1 ApS v Frandsen [1999] 1 WLR 2169), although this is complicated further in cases where the EU Insolvency Regulation applies.

Certain liabilities (for example, for criminal compensation orders) are also expressly excluded. As indicated in Section 2.9, there is a further distinction between unsecured debts which do not meet the criteria to be provable, and which are therefore payable only after all unsecured claims and interest on those claims have been paid in full, and unsecured debts which are not recoverable at all.

3.10.4  Secured creditors Where a creditor has been granted security by the company, it may: •

realise its security then prove for any balance owing; 86

Liquidation 3.10 •

assess the value of its security, declare the value to the liquidator then prove for any balance;

•

rely on the security for satisfaction of the debt in full and not prove at all; or

•

surrender the security to the liquidator and prove for the whole debt owed.

If such a creditor proves for the whole of its debt and omits to mention its security, however, it runs the risk of inadvertently surrendering that security, unless it is able to convince a court that its omission was inadvertent or the result of an honest mistake (r 14.16 IR 2016). The above applies only where the security was granted by the company itself. Where the security in question has been granted by a third party, the creditor remains free to prove for the whole of its debt.

3.10.5  The treatment of a proof The liquidator is obliged to allow the proofs lodged with them to be inspected by any other creditor who has submitted a proof (unless this proof has been wholly rejected) or any contributory (r 14.6 IR 2016). The liquidator may accept a proof for dividend purposes, or reject it in whole or in part, but in the latter case the liquidator must send a written statement of their reasons for rejection to the creditor. The creditor has 21 days from receipt of this statement to apply to the court to reverse or vary the liquidator’s decision. Indeed, it is also open to any other creditor or contributory to make an application to court within 21 days of becoming aware of the liquidator’s decision to accept or reject any proof (r 14.7 IR 2016). The court also has the power to expunge a proof, or reduce the amount claimed on the application of the liquidator, or of any creditor if the liquidator has declined to do so (r 14.11 IR 2016). Finally, a proof may be withdrawn or varied at any time by agreement between the creditor and the liquidator (r 14.10 IR 2016).

3.10.6  Quantification of claims As noted in Section 3.10.2, the debts for which a creditor may prove are not limited to those which are already due and owing and/or for an ascertained amount. Where a debt is subject to a contingency, or its value is otherwise uncertain, the liquidator is obliged to estimate its value. The liquidator may also revise any estimate previously made if they think fit, by reference to any change of circumstances, or to information becoming available to them (r 14.14 IR 2016). See also Section 3.11.1 in this regard. In the case of rent or other payments of a periodical nature, the creditor may prove for any amount due and unpaid up to the relevant date (r 14.22 IR 2016). Creditors are additionally entitled to prove for any future debt, ie a debt not yet due on the date of the liquidation. In this case, their dividend is calculated according to the formula X/(1.05)n, where ‘X’ is the value of the admitted proof, and ‘n’ is the period between the relevant date and the date the debt would otherwise have be due, expressed in years in a decimalised form. This reduces the dividend to reflect the early payment (r 14.44 IR 2016). As already noted in Section 3.6.4, there is a distinction between 87

3.11  Liquidation proving for a future debt and proving for statutory compensation for loss of rent following a disclaimer. Other rules provide that: •

where the debt bears interest, unpaid interest which accrued prior to the relevant date is provable as part of the debt (r 14.23 IR 2016) (the treatment of interest accruing after the relevant date is discussed in Section 2.8);

• all trade and other discounts which would have been available to the company but for the liquidation (other than any discount for immediate, early or cash settlement) must be discounted from any claim (r 14.20 IR 2016); and •

a debt incurred in a foreign currency is converted into sterling at the official exchange rate on the relevant date, which will result in practice in the creditors suffering a loss where the value of sterling falls between the relevant date and the date on which they receive a distribution (r 14.21 IR 2016).

Finally, in quantifying a claim, the liquidator is obliged to take account of any rights of set-off, as discussed in Chapter 2.

3.11  THE DISTRIBUTION PROCESS 3.11.1  Dividend for creditors The order of payment of creditors was discussed in Chapter  2. If and when the liquidator holds funds over and above those needed to cover the liquidation expenses of the winding-up and any claims of prior-ranking creditors which remain for the liquidator to deal with, the liquidator has a positive duty to distribute the excess funds to the unsecured creditors (r 14.27 IR 2016). The payment to creditors is known as a ‘dividend’. In many liquidations, only a final dividend will be paid (if any dividend is paid at all), but it is possible for a liquidator holding sufficient funds also to pay one or more interim dividends to creditors. The main steps involved in paying any dividend or making any distribution are as follows: •

In the case of a first dividend or distribution, the liquidator places a notice in the Gazette stating an intention to declare and distribute a dividend. The liquidator may also advertise such a notice in such other manner (if any) as they think fit (r 14.28 IR 2016).

•

The liquidator gives notice to all creditors who have not yet proved their debts. The notice must specify a last date by which proof may be delivered, termed ‘the last date for proving’, at least 21 days from the date of the notice, and state an intention to declare a dividend within two months of the last date for proving (rr 14.29 and 14.30 IR 2016).

•

Within 14 days of the last date for proving, the liquidator must admit, reject or make provision in respect every creditor’s proof if they have not already done so. The liquidator is not obliged to deal with proofs submitted after this date, although they may do so if they think fit (r 14.32 IR 2016). However, if a proof, or the liquidator’s decision on a proof, is contested (as per Section 3.10.5) during the two-month period, the liquidator may need to cancel or postpone the dividend (rr 14.33 and 14.34 IR 2016). 88

Liquidation 3.12 •

The liquidator gives a further notice declaring the dividend to all of the creditors who have proved (r 14.35 IR 2016). This can in practice be given at the same time as the dividend is paid. It will also contain various prescribed information, including the amounts realised from the sale of assets, payments made in the liquidation and the rate of the dividend.

If a creditor fails to prove before the dividend is declared, it is not entitled to disturb the distribution, although it is entitled to be paid out of monies available for any further dividend before that further dividend is paid (r 14.40 IR 2016).

3.11.2  The final dividend When the liquidator has realised all of the company’s assets, or so many of them as can in their opinion be realised without needlessly prolonging the liquidation, they must give notice either: •

of their intention to declare a final dividend; or

•

that no dividend (or further dividend) will be declared.

The notice will require all claims against the company to be established by a specified date, and the notice procedure is otherwise as per Section 3.11.1. After that specified date the liquidator may declare and pay any final dividend without regard to the claim of any person who has not already proved (rr 14.36 to 14.38 IR 2016). Nonetheless, even where the liquidator has declared but not paid a final dividend, the liquidator may still cancel the dividend if new information comes to light regarding creditors’ claims, since their overriding duty remains to make proper distributions between creditors (see Lomax Leisure Ltd v Miller [2008] EWCA Civ 525, where the liquidator cancelled cheques already posted).

3.12  DEALING WITH CREDITORS IN AN MVL Contingent debts or unknown creditors might potentially be seen as an obstacle to paying a final dividend to creditors in an MVL and then paying surplus monies to members within a year. However, in practice, there are tools here that will protect the liquidator, and in turn avoid the need for members to provide the liquidator with an indemnity. A liquidator may be asked to make an earlier distribution to members after providing for any known creditors, but in such cases the liquidator will be deprived of the protection of the provisions below and would therefore then be likely to ask for an indemnity from the members.

3.12.1  Contingent debts As noted in Section 3.10.6, where a debt is subject to a contingency, or its value is otherwise uncertain, the liquidator is obliged to estimate its value. However, this in turn enables the liquidator to place an early value on the claim. In Re Danka Business Systems Plc [2013] EWCA Civ 92, the company concerned had been placed into an MVL. The court allowed the liquidators to use a predecessor of r 14.14 IR 2016 to place a value on a tax indemnity given by the company, and thus bring the company’s obligations under that indemnity to an end in exchange for the 89

3.13  Liquidation payment of a specific sum to the beneficiary of the indemnity, despite objections by the beneficiary that, as a result, it would no longer receive the benefit of the bargain that it had struck with the company. A liquidator may be justified in placing a very low, or even a zero, value on the claim where there is a very low chance that the contingency will ever occur.

3.12.2  Unknown creditors Under r 14.28(1)(c) IR 2016, which applies only to an MVL, when the dividend or distribution is to be a sole or final distribution, the liquidator’s notice in the Gazette may include a statement that the distribution may be made without regard to the claim of any person in respect of a debt not proved. This effectively replicates an earlier rule which allowed the liquidator to advertise an intention to make a final distribution without regard to the claim of anyone who failed to prove by a date specified in the advertisement and which duly allowed the liquidator then to distribute the remaining assets to the members without the need to provide further for the claims of unknown creditors. Advertisement will not absolve the liquidator from their responsibility to contact persons who are actually known to be creditors, but have not yet proved (Re Armstrong Whitworth Securities Co Ltd [1947] Ch 673).

3.13  ENDING THE LIQUIDATION 3.13.1  The final account 3.13.1.1  Voluntary liquidation In a voluntary liquidation, as soon as the company’s affairs have been fully wound up, the liquidator must make up an account of the winding up, showing how it has been conducted and the company’s property has been disposed of. Rule 18.14 IR 2016 specifies the further contents of this account, which will include a final summary of receipt and payment, including details of remuneration and expenses. In an MVL, the liquidator must send a copy of this account to the members and the registrar of companies (s 94 IA 1986). In a CVL, the liquidator must send a copy of the account: •

to the members;

•

to the creditors (other than opted-out creditors) with a notice explaining the process by which the liquidator is released under s  173(2)(e) and how they might object to the liquidator’s release, and complying with various other requirements set out in r 6.28(2) IR 2016; and

•

following the last day of the period within which the creditors may object to the liquidator’s release, to the registrar of companies together with a statement of whether any of the creditors objected to the liquidator’s release.

See s 106 IA 1986 and r 6.28 IR 2016. The release, and the circumstances in which creditors might object to it, is discussed further in Section 3.13.3. 90

Liquidation 3.13 Once the liquidator has complied with the requirement to send the final account to the registrar of companies, the liquidator vacates office (s 171(6) IA 1986 for an MVL and s 171(7) for a CVL).

3.13.1.2  Compulsory liquidation In a compulsory liquidation, where it appears to a liquidator (other than the Official Receiver) that the winding up of the company is, for practical purposes, complete, the liquidator must make up an account of the winding up, showing how it has been conducted and the company’s property has been disposed of. Rule 18.14 specifies the further contents of this account, which will include a final summary of receipt and payment, including details of remuneration and expenses. The liquidator must send a copy of this account: •

to the creditors (other than opted-out creditors) with a notice explaining the process by which the liquidator is released under s  174(4)(d) and how they might object to the liquidator’s release, and complying with various other requirements set out in r 7.71(2) IR 2016; and

•

following the last day of the period within which the creditors may object to the liquidator’s release, to the registrar of companies together with a statement of whether any of the creditors objected to the liquidator’s release.

See s 146 IA 1986 and r 7.71 IR 2016. The release, and the circumstances in which creditors might object to it, is discussed further in Section 3.13.3. Once the liquidator has complied with the requirement to send the final account to the registrar of companies, the liquidator vacates office (s 172(8) IA 1986).

3.13.2 Dissolution The company will automatically be dissolved three months after the liquidator has sent the registrar of companies their final account (and statement, if applicable) (see ss 201 and 205 IA 1986 for a voluntary and compulsory liquidation, respectively), although the court can order the date of dissolution to be deferred on the application of any interested person. In Kumar v Secretary of State for Business, Energy & Industrial Strategy [2021]  EWHC  2965 (Ch) the applicant successfully appealed against a deferral which was excessive in length. There is also a ‘fast-track’ procedure under s 202 IA 1986 where the Official Receiver, if they remain liquidator in a compulsory liquidation, may apply for an early dissolution of a company whose assets will be insufficient even to cover the expenses of the winding-up and whose affairs appear to require no further investigation. Applications to restore a company which has been dissolved following a liquidation to the register may be made to the court within six years of dissolution (s 1029 CA 2006).

3.13.3  How does the liquidator obtain their release? In an MVL, the liquidator obtains their release at the time they vacate office (s 173(2)(d) IA 1986). 91

3.13  Liquidation In a CVL or a compulsory liquidation (where a person other than the Official Receiver is liquidator), however, a creditor is entitled to object to the liquidator’s release by giving notice in writing to the liquidator before the later of: •

the period of eight weeks after delivery of the notice; or

•

if any request for information regarding the liquidator’s remuneration and expenses or any application to court is made under r 18.9 IR 2016, when that request or application is finally determined, or

•

if any application to court asking for a determination that the liquidator’s remuneration and expenses are excessive is made under r 18.34 IR 2016, when that request or application is finally determined.

Should any of the company’s creditors object to the liquidator’s release, the liquidator will need to apply to the Secretary of State and the release will accordingly be granted at such time as the Secretary of State may, on an application by the liquidator, determine. Should no creditor object to the release within the required time period, the liquidator will again receive their release at the time they vacated office (s 173(2)(e) IA 1986 for a CVL and s 174(4)(d) for a compulsory liquidation). In all cases, the effect of the release is to discharge the liquidator from all liability, both in respect of acts and omissions of theirs in the liquidation and otherwise in relation to their conduct as liquidator. However, this does not protect the former liquidator from a later claim under s  212  IA  1986, which can be brought at any time whilst the company remains in existence. Such an action is possible even if the company has been dissolved, provided the time period for restoring the company has not yet expired (s 173(4) IA 1986 for a voluntary liquidation and s 174(6) IA 1986 for a compulsory liquidation). In turn, however, under s 1157 CA 2006 a court can grant liquidators relief from any prospective liability under s 212 IA 1986 if they are acting honestly and reasonably (Re Powertrain Ltd [2015] EWHC B26 (Ch)).

92

Chapter 4

Administration 4.1 INTRODUCTION Chapter 1 gave an overview of the administration process and Chapter 2 has already considered the order of priority which will apply to the extent that an administrator makes a distribution. Chapter 6 will consider the duties of directors, including their duties after a company has gone into administration. This chapter considers the normal administration process in more detail, and in particular: • the purpose of administration; • the methods of appointing an administrator and the consequences of doing so; • the powers and duties of an administrator; • the methods of exiting an administration; and • the concept of the pre-packaged administration. Table 4.1 compares a creditors’ voluntary liquidation with an administration. An administrator will, for example, have wider powers than a liquidator to run a business, but a liquidator may still have wider powers to bring proceedings against third parties in order to try to swell the asset pool available to creditors. As discussed later in this chapter, an administration will often be followed by a creditors’ voluntary liquidation, which may combine some of the advantages of both procedures. In some cases, modifications to the normal administration process will apply, for example, for energy companies, railway companies, insurance companies and banks. The ‘special administration’ process, which applies to ‘investment banks’, is an addition to this list. Discussion of these modified procedures is, however, beyond the scope of this book. Table 4.1 – Creditors’ voluntary liquidation versus administration Voluntary liquidation

Administration

Purpose of process

To get in and realise all of the company’s property and to distribute the proceeds to the company’s creditors.

Hierarchy of objectives: 1 the rescue of the company as a going concern; failing which 2 achieving a better result for the creditors as a whole than would be likely if the company were to go into liquidation; failing which 3 the realisation of property to enable a distribution to be made to secured (or preferential) creditors.

Identity of officeholder (where administrator is appointed out of court)

Members choose the initial liquidator. Creditors are given the opportunity to nominate a replacement within 14 days.

Subject to the views of any QFCH, director/company may choose the administrator. Creditors may replace the administrator, but this is harder and they may need to wait longer to do so.

93

4.2  Administration Power of officeholder prior to first interaction with creditors as a body

Very limited.

Very wide.

Power of officeholder following first interaction with creditors as a body

Reasonably wide.

Very wide, although must be exercised substantially in accordance with proposals or revisions agreed with creditors.

Effect on unsecured creditors

No moratorium, although liquidator may apply for a stay of proceedings and other actions by unsecured creditors.

Extensive moratorium prevents most creditor actions without either the consent of the administrator or the permission of the court.

Effect on secured creditors

Secured creditors free to enforce their security notwithstanding the liquidation.

Secured creditors cannot enforce their security without either the consent of the administrator or the permission of the court. Administrator has powers to sell secured assets.

Disclaimer

Ability to disclaim onerous property.

No ability to disclaim onerous property.

Proceedings against directors

Ability to bring wrongful trading, fraudulent trading or misfeasance proceedings.

Ability to bring wrongful trading and fraudulent trading proceedings.

Distribution to unsecured creditors

Does not require leave of the court.

Requires leave of the court (save in respect of the prescribed part), although some powers to make oneoff payments.

Distribution to members

Within the powers of a liquidator.

Not within the powers of an administrator.

4.2  WHAT IS THE PURPOSE OF ADMINISTRATION? 4.2.1  The meaning of the ‘purpose of administration’ Under para  111(1) Sch B1  IA  1986, the ‘purpose of administration’ is defined to mean an ‘objective specified in paragraph 3’ of Sch B1 IA 1986. Paragraph  3 Sch B1  IA  1986 in turn lists three specific objectives with which an administrator must perform their functions. These are: •

rescuing the company as a going concern (the ‘primary objective’);

•

achieving a better result for the company’s creditors as a whole than would be likely if the company were wound up (without first being in administration) (the ‘second objective’); or

•

realising property in order to make a distribution to one or more secured or preferential creditors (the ‘third objective’).

These objectives are hierarchical. The administrator must perform their functions with the primary objective of rescuing the company as a going concern unless they think either: •

that it is not reasonably practicable to achieve that objective; or

•

that the second objective would achieve a better result for the company’s creditors as a whole. 94

Administration 4.3 They may perform their functions pursuant to the third objective of realising property to make a distribution to secured and/or preferential creditors only if: •

they think that it would not be reasonably practicable to achieve either the first or second objectives; and

•

they do not unnecessarily harm the interests of the creditors of the company as a whole.

In Davey v Money [2018]  EWHC  766 (Ch) (at paras 252 to 256) the court noted that, by using the expression ‘thinks’ rather than, for example, ‘reasonably believes’, Parliament intended a degree of latitude to be given to an administrator in deciding upon which objective to pursue. The administrator is not lightly to be second guessed by the court with the benefit of hindsight. However, once the administrator has chosen an objective, this does not mean that the same latitude extends to the administrator’s choice of methods to achieve those objectives. In particular, the requirement when pursuing the third objective that the administrator does not unnecessarily harm the interest of creditors as a whole is not couched in terms of what the administrator thinks. It appears to invite a more objective standard of review.

4.2.2  Corporate rescue or business rescue? It is worth stressing here that the primary objective of administration is to rescue the company as a corporate entity. The second objective will not achieve this, but may well still achieve the rescue of the company’s business as a going concern by selling that business to a solvent buyer. There may often be little practical difference between these two outcomes so far as the company’s employees and customers are concerned. From this perspective, business rescue is a valuable aim in itself. From the creditors’ perspective, however, there will be a significant distinction as it will be the company, not the business, which remains liable to them. Following a sale of its business, the company may well be left largely as a hollow shell, although it may still hold a few assets which were not included in the sale. The creditors will share in the business sale proceeds, and any subsequent realisations, in accordance with the order of priority described in Chapter 2. An administration should nonetheless result in these sale proceeds being greater than they would have been on a liquidation, not least because an administrator is far better equipped to trade and subsequently sell the business as a going concern.

4.3  COMMENCING AN ADMINISTRATION 4.3.1  How is an administrator appointed? Table 4.2 shows the administration process in flowchart form. A company enters into administration when the appointment of an administrator takes effect (para 1(2) Sch B1 IA 1986). An administrator may be appointed in a number of ways. One route is by application to the court for an administration order, which will involve a hearing before a judge. However, there are two alternative routes available which simply involve the filing of certain papers with a court office. Because appointments by these routes do not involve a hearing before a judge, they are generally known as ‘out-ofcourt appointments’ and they are now the more commonly used. Table 4.3 compares the out-of-court and the court routes. 95

4.3  Administration Table 4.2 – The administration process

Court route

Out-of-court Company resolves or directors decide to appoint administrator

QFCH decides to appoint administrator

Company, directors or creditor (including QFCH) decides to appoint administrator

Five business days’ notice of intention given to any QFCH Notice of intention filed at court – interim moratorium commences

Two business days’ notice of intention given to any priorranking QFCH Notice of intention may be filed at court – interim moratorium commences

Application made to court – interim moratorium commences. Any QFCH (or priorranking QFCH) notified as soon as reasonably practicable

Notice of appointment filed at court

Notice of appointment filed at court

Court makes administration order

Administrator appointed and full moratorium commences

Administrator notifies company and creditors of appointment and advertises in Gazette

Administrator makes proposals, and seeks a decision on those proposals from the creditors. Administrator then implements the proposals (or revised proposals) as approved by creditors

Administrator’s appointment automatically ends after 12 months unless extended by court or creditors

Administrator sells company’s business or assets. Company enters CVL or is dissolved

Company survives (possibly via CVA, Scheme of Arrangement or Restructuring Plan)

96

Administration 4.3 Unlike a liquidation, the manner in which an administrator is appointed will not affect their powers or duties once appointed. Table 4.3 – Out-of-court versus court appointment Advantages of an out-of-court appointment •

Quicker and cheaper than a court appointment.

•

An out-of-court appointment can be made by a QFCH outside court office hours (although a court hearing can also be convened outside court office hours in cases of urgency).

•

No need to produce evidence to convince the court that the purpose of administration is reasonably likely to be achieved.

Advantages of a court appointment •

This is the only route available to a creditor (other than a QFCH – see Section 4.3.3 – whose security is enforceable).

•

It may be the only route available to the company or its directors in certain circumstances, for example, where a creditor has presented a winding-up petition.

•

Where there is a cross-border element, a court order may be required before the appointment will be recognised in other jurisdictions and it may also be desirable to have the benefit of a judicial decision that the company’s centre of main interests is in the United Kingdom.

•

A court appointment may be desirable for other reasons (see, for example, Re Christophorus 3 Ltd [2014] EWHC 1162 (Ch) in Section 11.7.2.1).

4.3.2  Who will the administrator be? Only a qualified insolvency practitioner can be appointed as an administrator. In practice, any person seeking to appoint an administrator will need to identify their preferred insolvency practitioner and to discuss the process with them in advance. As explained in greater detail below, the would-be appointor must name their proposed administrator in their application or other appointment documentation, and the proposed administrator must consent to the appointment and have satisfied themselves that the purpose of administration can be fulfilled. As discussed below, specific mechanisms exist to allow a qualifying floating charge holder (referred to here as a ‘QFCH’) to substitute their own choice of administrator in place of one chosen by the company or the directors. The unsecured creditors may also have some ability to influence the choice of administrator. In The Oracle (North West) Ltd v Pinnacle Services (UK) Ltd [2008]  EWHC  1920 (Ch), which concerned an application to the court for an administration order, the directors and the largest unsecured creditor proposed different choices of administrator. The court favoured the creditor’s choice, observing that an administration was ultimately for the creditors’ benefit. However, it will be more difficult for unsecured creditors to intervene in the choice of administrator if there is an out-of-court appointment.

4.3.3  What is a QFCH? The concept of a QFCH is important here. Different rules apply where a QFCH is seeking to appoint an administrator, whether by a court or an out-of-court route. In 97

4.3  Administration addition, any other person seeking to appoint an administrator is usually required to give advance notice to any QFCH. There is a two-limb test to determine whether a creditor is a QFCH: First, under para 14(1) Sch B1 IA 1986, a floating charge is a qualifying floating charge if it was created by an instrument which: •

states that para 14(1) applies to the floating charge; or

•

purports to empower the holder to appoint an administrator; or

•

purports to empower the holder to appoint a receiver who would be an administrative receiver under s 29(2) IA 1986.

Secondly, a person is a QFCH if they hold security over the company’s assets comprising: •

a qualifying floating charge which relates to the whole or substantially the whole of the company’s property; or

•

a number of qualifying floating charges which together relate to the whole or substantially the whole of the company’s property; or

•

charges and other forms of security which together relate to the whole or substantially the whole of the company’s property and at least one of which is a qualifying floating charge.

The meaning of ‘the whole or substantially the whole’ is discussed in Chapter 9.

4.3.4  Out-of-court appointment by the company or its directors Either the company or its directors (or a majority of the directors) may appoint an administrator out of court. The process for making such an application is set out in full in paras 22 to 34 Sch B1 IA 1986 and rr 3.23 to 3.26 IR 2016, but an overview is given here. Any documents which the applicant needs to be file with the court as part of this process must be filed online using the court’s electronic working portal, a process known as ‘CE-filing’. Two practice directions, Practice Direction: Insolvency Proceedings [2020] BCC 698 and Temporary Insolvency Practice Direction (No  5) Supporting the Insolvency Practice Direction [2021]  BCC  877 are also relevant to this filing process. They will be referred to here as the ‘Insolvency Practice Direction 2020’ and the ‘Miscellaneous Insolvency Practice Direction 2021, or ‘MIPD 2021’.

4.3.4.1  Restrictions on the power to appoint Neither the company nor its directors may make an out-of-court appointment: •

unless the company is or is likely to become unable to pay its debts;

•

if at any time during the previous 12 months, a previous administrator appointed by, or on the application of, the company or its directors was in office (para 23 Sch B1 IA 1986); or 98

Administration 4.3 •

if a winding-up petition or an administration application has been presented and not yet disposed of, or an administrative receiver is in office (para  25 Sch B1 IA 1986). If a winding-up petition was only presented after the person proposing to make the appointment filed a notice of intention to appoint (see Section 4.3.4.2), this will not prevent the appointment of an administrator, however, unless the petition was presented on public interest grounds (para 25A Sch B1 IA 1986).

If there is an existing winding-up petition, or if there was a previous administration, the company or the directors will need to make an application to the court instead. Any company or its directors seeking to make an out-of-court appointment will therefore need first to make a search for existing winding-up petitions. However, such a search will not always reveal a winding-up petition presented very shortly before the time of the search. Where a company falls into one of the categories described in s  362(1)(a)–(c) of the Financial Services and Markets Act 2000 (FSMA 2000), the written consent of the appropriate regulator will be required before making the appointment (s 362A FSMA  2000). The Prudential Regulation Authority (PRA) will be the appropriate regulator where the company is a PRA-regulated person, otherwise the appropriate regulator will be the Financial Conduct Authority (FCA). In practice, an online search of the Financial Services Register will reveal whether the company falls into one of these categories and if so whether it is regulated by the PRA or the FCA. This is a check worth making prior to almost any appointment, since many companies do carry out some form of regulated activity as an ancillary function to their main business activities. As discussed in Chapter 7, if the company is the subject of a moratorium under Part A1  IA  1986 this will not prevent the directors from making an out-appointment. However, the director will need to disclose the existence of the moratorium within the notices described in Sections 4.3.4.2 and 4.3.4.4 (see r 3.23(1)(ea) and r 3.25(2)(ea) IR 2016 respectively).

4.3.4.2  Notice of intention to appoint The company or the directors must serve a notice of intention to appoint an administrator on any QFCH (para  26(1) Sch B1  IA  1986). They cannot appoint until either at least five business days (not counting the date on which the notice was served) have elapsed or each QFCH has consented to their doing so (para 28(1) Sch B1  IA  1986). This is designed to give a QFCH the opportunity to intervene by appointing their own choice of administrator or, if circumstances permit, an administrative receiver instead (see Section 4.3.5). In Re OMP  Leisure Limited [2008] BCC 67, it was made clear that this notice needs to be given regardless of whether the QFCH’s charge is currently enforceable. However, there was no need to give notice to a person whose security was still registered at Companies House but who had in practice been repaid and whose security should therefore have been discharged. The contents of a notice of intention are prescribed by r 3.23(1)  IR  2016. The notice must be accompanied by a statutory declaration by the person making the appointment that the company is, or is likely to become, unable to pay its debts, that it is not in liquidation and that none of the restrictions referred to in Section 99

4.3  Administration 4.3.4.1 apply (para 27(2) Sch B1 IA 1986). Paragraph 10 of the MIPD 2021 helpfully provides that the relevant statutory declaration may be made by video conferencing with the independent solicitor or other person authorised to administer the oath, which avoids the need physically to visit an independent solicitor’s office for this purpose. The notice needs also to be filed with the court as soon as reasonably practicable (para 27(1) Sch B1 IA 1986) and no more than five business days after the date on which the statutory declaration was sworn (r 3.23 IR 2016). The documents which must accompany the filing are discussed in Section 4.3.4.5. In practice, the company or directors may choose to comply with this requirement first so that they can then serve a sealed notice on the QFCH. Paragraph 3 of the MIPD 2021 stipulates that a notice of intention will be treated as having been filed with the court at the date and time recorded in the e-mail from the court confirming receipt of the filing, notwithstanding that in practice it will take the court office some additional time to review the documents filed and to return a sealed copy of the notice. However, para 5 of the MIPD 2021 makes it clear that, notwithstanding this, where a notice of intention is filed outside the time period of 10:00 hours to 16:00 hours on a day that the courts are open for business it will be treated as having been delivered at 10:00 hours on the next day that the courts are open for business. As a result, CE-filing cannot be used to commence an interim moratorium outside court business hours (see Section 4.3.4.3). The company must also notify a range of other prescribed persons of the proposed appointment (para  26(2) Sch B1  IA  1986). These prescribed persons are listed in r 3.23(4) IR 2016 and include: •

any enforcement officer who is charged with an execution or other legal process against the company and any person who has distrained against the company or its property, any supervisor of a CVA; and

•

the company itself if it is the directors making the appointment.

There is no need to wait five business days after notifying these other prescribed persons. A range of cases have examined whether an appointment can remain valid should the company or its directors fail to give notice to one of these prescribed persons (or to a regulator under s  362A FSMA  2000). The approach of the courts is now to consider the consequences of the non-compliance and determine whether, as a result, the entire appointment is invalid or whether the non-compliance is simply a curable defect (see Ceart Risk Services Limited [2012]  EWHC  1178 (Ch) and Re BXL Services [2012] EWHC 1877 (Ch)). Nevertheless, it is wisest still to ensure that all prescribed persons are properly given notice. On a directors’ appointment in particular, good practice might be to ensure that a notice of intention is delivered to the company’s registered office and a copy also served on the company’s solicitors (see r 1.40 IR 2016).

4.3.4.3  The interim moratorium An interim moratorium will take effect from the point when any notice of intention is filed at court (see Section 4.3.4.2). The moratorium will end if no administrator is 100

Administration 4.3 appointed within ten business days, beginning with the date of filing the notice of intention (paras 28(2) and 44(4) Sch B1 IA 1986, and as also now clarified in para 5 of the MIPD 2021). The courts have examined whether a company might still secure a moratorium by filing such a notice where, for instance, the company is not quite ready to appoint an administrator and creditors are already looking to exercise ‘self-help’ remedies: • in Re Cornercare Limited [2010] EWHC 893 (Ch), the court also confirmed that a company could file a second notice of intention to appoint once the period of ten business days following an initial notice of intention had expired. Should an unscrupulous company attempt to engineer a continuing moratorium by filing repeated notices of intention, the court would have adequate powers to treat that as an abuse and act accordingly; but • in JCAM Commercial Real Estate Property XV Limited v Davis Haulage Limited [2017] EWCA Civ 267, where the company had filed a fourth successive notice of intention to protect it whilst it was preparing a CVA proposal, however, the Court of Appeal made it clear that it was inappropriate to file such a notice where there was no settled intention to appoint an administrator. It also made it clear that no such notice could be filed unless there was a QFCH on which to serve it.

4.3.4.4  Notice of appointment The appointment of the administrator takes effect when a notice of appointment is filed with the court, together with any accompanying documents described here and in Section 4.3.4.5. In this regard: •

Where a notice of intention was required, therefore, two consecutive filings are needed to complete the appointment process. The contents of the second filing, the notice of appointment, are prescribed by r 3.24(1)  IR  2016. They include, in particular, a statement that the company or the directors have given notice of their intention to appoint to each QFCH and that either five business days have elapsed since notice was given or each QFCH has consented to the appointment. The notice must be accompanied by a statutory declaration (which may be made via a video conference if so desired) that the person is entitled to make the appointment, that the appointment is accordance with Schedule B1 IA 1986 and that the statements made in the statutory declaration filed with the notice of intention remain accurate (para 29(2) Sch B1 IA 1986).

•

If no notice of intention was required, a slightly different form of notice of appointment is prescribed by r 3.25(1) and (2) IR 2016. The notice must contain a statutory declaration (which may again be made via a video conference if so desired) confirming the matters which would otherwise have been covered in the notice of intention.

Paragraph  3 of the MIPD  2021, described in Section 4.3.4.2, applies equally to a notice of appointment. Paragraph 6 provides that where a notice of appointment is filed outside court business hours, it will be treated as having been delivered at 10:00 hours on the next day that the courts are open for business. As a result, neither a company nor its directors may use CE-filing to appoint an administrator outside court business hours. 101

4.3  Administration In either case, the relevant statutory declaration must not have been made more than five business days prior to the filing. Paragraph 28(2) Sch B1 IA 1986 makes it clear that, where a notice of intention was filed, the administrator must be appointed within ten business days, beginning with the date of filing that notice of intention. Notwithstanding this, the court has held that an appointment which was inadvertently made on the eleventh business day remained valid (see Re Euromaster Ltd [2012] EWHC 2356 (Ch)). However, it still seems wisest to ensure that, if the appointment has not been made within the period of ten business days, a new notice of intention is filed before making the appointment.

4.3.4.5  Accompanying documents Any notice of intention to appoint filed at the court must be accompanied by either a copy of the resolution of the company to appoint or a record of the decision of the directors, as the case may be (r 3.23(2) IR 2016). In this respect: •

the court questioned in Re Frontsouth (Witham) Ltd [2011]  EWHC  1668 (Ch) whether a resolution of the members alone was sufficient to allow the company to be placed into administration without a decision of the directors where the company in question had standard form articles that provided that the business of the company should be managed by the directors. Many practitioners therefore take the view that the Frontsouth decision makes it unlikely that a company, acting by its members, could ever therefore appoint an administrator where the directors were opposed to this; and

•

the courts have made it clear that a decision of the directors to place the company into administration must be taken at a validly convened and quorate board meeting in accordance with the company’s articles of association (Minmar (929) Limited v Khalatschi [2011]  EWHC  1159 (Ch) and Re BW  Estates Limited [2017]  EWCA  Civ 1201). The case of Fore Fitness Investments Holdings Limited [2022]  EWHC  191 (Ch) also unhelpfully held that a company with amended standard form articles and which had only a sole director could not hold a quorate board meeting for these purposes. The Fore Fitness decision has been criticised and in Re Active Wear Limited [2022]  EWHC  2340 (Ch), a case involving a company with standard form articles, the court took a different path. Nevertheless a company with a single director should still consider whether it needs first to change its articles or to appoint an additional director.

The notice of appointment filed at the court must be accompanied by: •

where a notice of intention to appoint has been used, the written consent of each QFCH unless the period of five business days has expired (r 3.26(1) IR 2016);

•

where no notice of intention to appoint has been used, a copy of the resolution of the company to appoint or a record of the decision of the directors, as the case may be (r 3.26(2) IR 2016);

•

in every case, a statement from each proposed administrator consenting to act, giving details of any prior professional relationships they have had with the company, and stating that in their opinion the purpose of administration is reasonably likely to be achieved (para  29(3) Sch B1  IA  1986 and r 3.26(1) IR 2016); and 102

Administration 4.3 •

where there are joint administrators, a statement indicating which of their functions can be exercised individually and which must be exercised jointly (para  100(2) Sch B1  IA  1986; this is, accordingly, often referred to as a ‘paragraph 100(2) statement’) although the paragraph 100(2) statement will in practice tend to be included within the notice of appointment rather than take the form of a separate document.

4.3.5  Out-of-court appointment by a QFCH Alternatively, a QFCH may appoint an administrator out of court. The process for making such an application is set out in full in paras 14 to 21 Sch B1 IA 1986 and rr 3.16 to 3.22 IR 2016, but an overview is given here.

4.3.5.1  Restrictions on the power to appoint There are comparatively few restrictions on the ability of a QFCH to make an outof-court appointment. For example, in contrast to an out-of-court appointment by the company or its directors, where a company falls into one of the categories described in s 362(1)(a)–(c) FSMA 2000, there is no need to obtain the written consent of the appropriate regulator. However, a QFCH is not entitled to do so where: •

its floating charge has not yet become enforceable (para 16 Sch B1 IA 1986); or

• a provisional liquidator has been appointed or an administrative receiver is already in office (para 17 Sch B1 IA 1986). This does not prevent the QFCH applying to the court for the provisional liquidation to be terminated and an administration order made instead.

4.3.5.2  Notice of intention to appoint A QFCH must serve a notice of intention to appoint an administrator on any priorranking QFCH. For these purposes, one floating charge is prior to another if it was created first, or if it has priority pursuant to an agreement between those QFCHs. A QFCH cannot appoint until either at least two business days (not counting the date on which the notice was served) have then elapsed or each prior-ranking QFCH has consented to them doing so (para 15 Sch B1 IA 1986). In Eco Link Resources Ltd [2012] BCC 731 the court held that the failure to serve a prior ranking QFCH would automatically invalidate the appointment. However, when the same issue fell to be decided in the more recent case of Re NMUL Realisations Ltd [2021] EWHC 94 (Ch) the court viewed the subsequent authorities and held that this was a curable defect. The Court of Appeal has also held that QFCH may appoint an administrator notwithstanding that its floating charge was granted in breach of a negative pledge (SAW (SW) 2010 Ltd v Wilson [2017]  EWCA  Civ 1001). In contrast, however, an appointment by a QFCH which had failed to comply with a contractual obligation under a deed of priority to obtain the prior consent of a more senior creditor prior to appointing was automatically void (Arlington Infrastructure Limited v Woolrych [2020] EWHC 3123 (Ch)). 103

4.3  Administration The contents of the notice of intention are prescribed by r 3.16(2) IR 2016. There is no requirement to file the notice of intention with the court. However, the QFCH may choose to do so, since an interim moratorium will take effect when the notice of intention is filed (see Section 4.4.1.3). If the QFCH does choose to file it with the court, it must do so at the same time as it gives notice to the QFCH holder (r 3.16(4) IR 2016). The interim moratorium will end if no administrator has been appointed within five business days, beginning with the date of the filing (para 44(2) Sch B1 IA 1986).

4.3.5.3  Notice of appointment The appointment of the administrator takes effect when a notice of appointment and any accompanying documents are filed with the court (para 19 Sch B1 IA 1986). The contents of the notice of appointment are prescribed by r 3.17(1) IR 2016. The notice must contain a statutory declaration (made no more than five business days prior to the filing, and which may be made via a video conference if so desired) that, among other things, the appointor is a QFCH and that its charge is enforceable (para  18 Sch B1  IA  1986). It must be accompanied either by evidence that the appointor has given at least two business days’ notice to any prior-ranking QFCH or the written consent of any prior-ranking QFCH(s). The other accompanying documents are the administrators’ consents to act and the paragraph 100(2) statement described in Section 4.3.4.5 (r 3.18 IR 2016).

4.3.5.4  Out of hours appointments Paragraph  3 of the MIPD  2021, described in Section 4.3.4.2, applies equally to a notice of appointment by a QFCH. Where a notice of appointment is CE-filed outside court business hours, it will be treated as having been delivered at 10:00 hours on the next day that the courts are open for business. Paragraph 8 of the MIPD 2021 makes it clear that a QFCH is unable to use CE-filing to appoint an administrator outside court business hours. Nevertheless, there is a separate route by which a QFCH can make an out of hours appointment. When the court is closed, a QFCH is entitled to fax a notice of appointment to a designated telephone number or to e-mail the notice of appointment to a designated e-mail address, each of which is published on the Insolvency Service website (www.gov.uk/government /organisations/insolvencyservice) (r 3.20 IR 2016). The contents of the notice of appointment to be used for an out of hours appointment are prescribed by r 3.21(1) and (2) IR 2016. The notice is designed to be the only document that will need to be faxed or e-mailed to the court. Consequently, it includes a confirmation that a notice of intention was sent to any prior QFCH, a confirmation that every written consent required from a QFCH is in the appointor’s possession, a statement that the administrators have consented to act, and a paragraph  100(2) statement. It also includes the same statutory declaration as was referred to in Section 4.3.5.3. The appointment will take effect from the date and time of the fax transmission or the sending of the e-mail (r 3.22(2)(a) IR 2016). 104

Administration 4.3 If faxing the notice of appointment, the QFCH will need to retain a copy of the fax transmission report showing the date and time of transmission and at least part of the first page of the notice of appointment. Similarly, if e-mailing the notice of appointment, the QFCH will need to retain a hard copy of the e-mail detailing the date and time of the e-mail and the address to which it was sent and containing a copy of the document sent as an attachment. In accordance with r 3.20(9) IR 2016, the QFCH must take to the court, on the next day the court is open for business, physical copies of: •

the notice of appointment;

•

the fax transmission report or hard copy of the e-mail;

•

any notices of intention sent to QFCHs (if not already filed with the court) and each QFCH’s written consent; and

•

a statement setting out full reasons for the out-of-court filing and the reasons why it would have been damaging to the company and its creditors for the appointor to have done otherwise.

This requirement to file physical copies applies notwithstanding that, at the time of writing, notice and applications are generally filed electronically with the courts. If the QFCH fails to comply with these requirements, the administrator’s appointment will lapse (r 3.22(2)(b) IR 2016).

4.3.6  Appointment by the court The process for making an administration application is set out in full in paras 12 and 13 Sch B1 IA 1986 and rr 3.3 to 3.15 IR 2016, but an overview is given here.

4.3.6.1  Who may apply for such an order? Under para 12(1) Sch B1 IA 1986, an application to the court for an administration order may be made by: • the company; or •

all or a majority of its directors (see para 105 Sch B1 IA 1986); or

• any creditor or creditors, including a contingent or prospective creditor (see para 12(4) Sch B1 IA 1986); or •

the designated officer of a magistrates’ court in the exercise of the powers conferred by s  87A  Magistrates’ Courts Act 1980 (enforcement of fines imposed on companies); or

•

any combination of the above.

Special rules may apply where the applicant is a QFCH, or when a QFCH wishes to intervene in the application. These are discussed in Section 4.3.6.6. Other sections of the legislation also specifically allow the supervisor of a CVA, or a liquidator, to make an application in the name of the company. The FCA and the PRA (in relation to a PRA-regulated company) are also entitled to apply (s 359 Financial Services and Markets Act 2000). Unlike a winding-up petition, however, neither individual members nor the Official Receiver or the Secretary of State have the standing to apply. 105

4.3  Administration

4.3.6.2  When can a creditor make an application? Section 3.4.3 looked at where a creditor whose debt is disputed or is subject to a counterclaim could present a winding-up petition. It appears that the court’s jurisdiction to make an administration order is wider, on the basis that the consequences of administration are less drastic for the company (Re MTI Trading Systems Ltd & others [1998]  BCC  400). The court may therefore be prepared to make an order even where a debt is disputed or where a counterclaim exists if there are good reasons to do so, although the administration process should not be used as a vehicle for resolving a dispute (Hammonds (A Firm) v Pro-fit USA Ltd [2008] 2  BCLC  159). In Fieldfisher v Pennyfeathers [2016]  EWHC  566 (Ch), the court refused to make an administration order on the basis of a disputed debt where the relevant agreement required such disputes to be determined by arbitration.

4.3.6.3  What is the application process? The contents of the administration application are prescribed by r 3.3  IR  2016. Amongst other things, the application itself will contain a statement by the applicant that it believes that the company is, or is likely to become, unable to pay its debts. The application must be accompanied by: •

a statement from each proposed administrator consenting to act (as described in Section 4.3.4.5);

•

a witness statement containing, among other things, a statement of the company’s financial position and specifying (to the best of the applicant’s knowledge and belief) the company’s assets and liabilities, details of any insolvency proceedings which are already afoot (including any winding-up petition that has been presented) and any other matters which in the applicant’s opinion will assist the court in deciding whether to make an administration order (r 3.6 IR 2016). This witness statement will in practice need to contain enough information to convince the court to make an order.

In cases of extreme urgency, the court does have the power to make an interim appointment of an administrator on the basis of an oral application, although a formal application and written evidence will need to follow (see SB  Corporate Solutions Limited v Colin Andrew Prescott [2012] Bus LR D91). The initial application can even be made without notice to the company (see Section 4.3.6.4) if there is sufficient need for secrecy.

4.3.6.4  What are the notice requirements? The applicant must as soon as is reasonably practicable notify: • any QFCH (para  12(2) Sch B1  IA  1986). The QFCH may intervene by applying to the court for their own choice of administrator to be appointed in place of the applicant’s choice (see Section 4.3.6.6); and •

any enforcement officer who is charged with an execution or other legal process against the company and any person who has distrained against the company or its property (r 3.9 IR 2016). 106

Administration 4.3 Under r 3.8 IR 2016, the application and witness statement also need to be served on the following (where relevant): the company (if the application is made by anyone other than the company itself); any proposed administrator; any administrative receiver; any petitioner who has presented a winding-up petition; any provisional liquidator; any supervisor of a CVA; and, if there is a Part A1 Moratorium in force for the company, the monitor. This is designed to allow any such interested persons the chance to consider the application, and if necessary appear at the hearing to present their own views. An interim moratorium will take effect from the point when the application is made (see Section 4.4.1.3).

4.3.6.5  The court hearing Under para 11 Sch B1 IA 1986, the court will only make an administration order if it is satisfied that: •

the company is or is likely to become unable to pay its debts (see Chapter 1); and

•

the administration order is reasonably likely to achieve the purpose of administration.

In Re AA Mutual International Insurance Company Ltd [2005] 2 BCLC 8, the court confirmed that ‘likely’ meant ‘more probable than not’, but that ‘reasonably likely’ simply equated with a ‘real prospect’ test. The first limb of the test was considered further in Highberry Ltd v Colt Telecom Group plc (No 2) [2003] BPIR 324, which related to a creditors’ application made by bondholders. The court felt unable to conclude that the company was more likely than not to become cash-flow insolvent simply because there was uncertainty as to whether it would be able to repay or refinance the bonds when they matured nearly four years later. The second limb has been considered on a number of occasions. The court was persuaded to make an order in Auto Management Services Ltd v Oracle Fleet UK Ltd [2008] BCC 761 on the basis, among other things, that the administration moratorium would help preserve value in a lease under which the company was a tenant and that the ability of an administrator to continue to trade would help preserve goodwill. The proposed administrator need not identify with certainty which of the three objectives of administration will be achieved (see the Hammonds v Pro-fit case). However, in Doltable Ltd v Lexi Holdings Plc [2006] BCC 918, the court considered that none of the three objectives had been established – the purpose of the application in that case appeared to be to prevent the sale of the property owned by the company by a receiver. The case of Green v Gigi Brooks Limited [2016] EWHC 961 (Ch) is a more recent example where the creditor making the application was unable to satisfy the court that either limb of the test was satisfied. It shows the difficulties that an external creditor may face, given that they will frequently have less access to information about the company than the company itself has. Under para  13(1) Sch B1  IA  1986, on hearing an administration application, the court may as an alternative (or in addition) to making an administration order: 107

4.4  Administration •

dismiss the application;

•

adjourn the hearing conditionally or unconditionally;

•

make an interim order;

•

treat the application as a winding-up petition and make any order which it can make under s 125 IA 1986 (see Chapter 3) – this power was used, for example, in Re Ci4net.com Inc [2005] BCC 277; or

•

make any other order it thinks fit.

4.3.6.6  Special rules applicable to a QFCH A QFCH may apply for an administration order without needing to satisfy the court that the company is or is likely to become unable to pay its debts (para 35 Sch B1 IA 1986) although it will still need to submit sufficient evidence to satisfy the court that there is a ‘real prospect’ that one or more of the statutory purposes of administration might be achieved (High Street Rooftop Holdings Ltd [2020] EWHC 2572 (Ch)). In addition, where the existing applicant is someone other than a QFCH, the QFCH may intervene in the application to seek the appointment of its own choice of administrator instead, and the court is required to have regard to its wishes unless the particular circumstances of the case dictate otherwise (para 36 Sch B1 IA 1986). In both of these cases, however, the QFCH will need to satisfy the court that it would have been entitled to make an out-of-court appointment, as described in Section 4.3.5. Among other things, its witness statement will therefore also still to give sufficient details to satisfy the court that its security is enforceable (r 3.6(4) IR 2016).

4.4  WHAT IS THE EFFECT OF THE ADMINISTRATION MORATORIUM? 4.4.1  How does the moratorium protect the company? The administration moratorium is perhaps the most important feature of the administration process. It is designed to protect the company from most of the remedies that its creditors would otherwise be entitled to exercise. Unlike the liquidation moratorium, its main function is not to preserve the pari passu principle, but to create a temporary breathing space whilst the administrator attempts to fulfil the purpose of administration.

4.4.1.1  Moratorium on insolvency proceedings Whilst the company is in administration: •

No resolution may be passed or order made for the winding-up of the company. (An exception applies when a petition is presented on public interest grounds or by the Financial Services Authority under s  367 Financial Services and Markets Act 2000. If an administrator becomes aware that such a petition exists, they must apply to the court for directions (para 42 Sch B1 IA 1986).)

•

No administrative receiver may be appointed (para 43(6A) Sch B1 IA 1986). 108

Administration 4.4

4.4.1.2  Moratorium on other actions In addition, under para  43 Sch B1  IA  1986, the following actions are prohibited whilst the company is in administration except with the consent of the administrator or with the permission of the court: •

taking any step to enforce security over the company’s property; or

•

taking any step to repossess goods in the company’s possession under a hirepurchase agreement (which for these purposes includes a conditional sale agreement, a chattel leasing agreement and a retention of title agreement – para 111 Sch B1 IA 1986); or

•

in the case of a landlord, exercising a right of forfeiture by peaceable re-entry in relation to premises let to the company; or

•

instituting or continuing a legal process (including legal proceedings, execution and distress) against the company or its property.

The term ‘legal process’ includes the presentation of a winding-up petition (Re Arucana Ltd [2009] EWHC 3838 (Ch)). In Re Olympia v York Canary Wharf Ltd [1993] BCC 154, the court took the view that the term ‘legal process’ did not extend to the service of a contractual notice. However, the term ‘legal proceedings’ has nonetheless been held to extend a wide category of legal and quasi-legal proceedings, for example, the reference of a dispute under a building contract to a statutory adjudication procedure (A Straume (UK) Ltd v Bradlor Developments Ltd [2000] BCC 333) and an investigation by the Gambling Commission (Frankice (Golders Green) Ltd [2010] EWHC 1229 (Ch)). In Frankice, the court concluded that the word ‘process’ suggested something with a defined beginning and an ascertainable final outcome and which in the interim was governed by a recognisable procedure. The word ‘legal’ indicated that the process must in some sense invoke the compulsive power of the law, and must be quasi-legal in nature. One indicator of this might be that the process envisages the possibility of an appeal although this was not determinative in itself. The administration moratorium will not prevent a party from exercising a right of set-off against the company.

4.4.1.3  The interim moratorium Where a person has made an application for an administration order, or has filed a notice of intention to appoint an administrator, the provisions described in Sections 4.4.1.1 and 4.4.1.2 will similarly apply pending the administrator’s appointment (ignoring for these purposes any reference to the consent of the administrator) (para 44 Sch B1 IA 1986). However, it will expire if no administrator is appointed within any required period of time.

4.4.2  What is the role of the administrator? The leading authority in this area, Re Atlantic Computer Systems plc [1992] Ch 505, indicated that in most cases the matter can be dealt with by the administrator so that applications to the court will be the exception rather than the rule. An administrator should act reasonably when faced with such a request, since they may be criticised 109

4.4  Administration and possibly penalised in costs by the court should they refuse to give their consent in circumstances where they should have realised the permission of the court was likely to be granted.

4.4.3  When will the court grant permission? In Atlantic Computers, the court set out a number of guidelines, although stressing that these were not intended to replace the general discretion given to the court in dealing with applications for leave. These are summarised in Table 4.4. The Frankice case discussed in Section 4.4.1.2 and the various cases where landlords have applied for permission to forfeit discussed in Section 10.2.3.3 are examples of the court carrying out the necessary balancing exercise. The court is more likely to grant permission where the applicant is a secured creditor, or has some proprietary interest. In Sinai Securities Ltd v Hooper [2004] BCC 973, the court permitted the applicant to appoint a non-administrative receiver. It held that not only was this unlikely to impede the purpose of the administration, but might be beneficial to this purpose since the receiver would be better able to make an application for planning permission. Other cases involving landlords are discussed in Chapter 10. Under para 43(7) Sch B1 IA 1986, the court may impose conditions when it gives permission. For example, in Re City Logistics Ltd [2002] 2 BCLC 103, a creditor which had supplied racking to a company on retention of title terms was only allowed to repossess its goods after a particular date to allow the administrators the time to remove other goods stored in the racking. It was held in Atlantic Computers that the court also has the ability to impose conditions when refusing permission. For example, it might order the administrator to pay rent to a landlord. In AES Barry Ltd v TXU Europe Trading Ltd [2005] 2 BCLC 22, it was held that where the applicant has only a straight monetary claim, permission will generally only be granted in exceptional circumstances. Table 4.4 – Summary of the Atlantic Computers guidelines 1

The person seeking permission must always make out a case for permission to be given.

2

If granting permission to the owner of land or goods to exercise their proprietary rights and repossess their land or goods is unlikely to impede the achievement of the purpose of the administration, permission should normally be given.

3

In other cases when a lessor seeks possession, the court has to carry out a balancing exercise, weighing the legitimate interests of the lessor against those of the other creditors.

4

In carrying out the balancing exercise, great weight should normally be given to the lessor’s proprietary interests. An administration for the benefit of unsecured creditors should not be conducted at the expense of those who have proprietary rights, save where this is unavoidable.

5

It will normally be sufficient ground for the grant of permission if significant loss would be caused to the lessor by a refusal. However, if substantially greater loss would be caused to others by the grant of permission, that may outweigh any such loss to the lessor.

6

In assessing these respective losses, the court will have regard to matters such as: –

the financial position of the company, and its ability to pay the rental arrears and the continuing rentals,

–

the administrator’s proposals,

110

Administration 4.5 –

the period for which the company has already been in administration and the length of time for which it is expected to continue,

–

the effect on the administration if permission were given and on the applicant if permission were refused,

–

the end result sought to be achieved by the administration and the prospects of it being achieved, and

–

the history of the administration so far.

7

The court will need to take into account how probable any suggested consequences are.

8

The conduct of the parties may also be a material consideration in a particular case. A lessor should make its position clear to the administrator at the outset of the administration and, if it should become necessary, should apply to the court promptly.

9

The above considerations may be relevant not only to the decision whether permission should be granted or refused, but also to a decision to impose terms on any permission that is granted.

10 The court is also entitled to impose terms as a condition for refusing permission and in this event the above considerations will also apply. 11 A broadly similar approach will be applicable on many applications to enforce security. If the applicant is fully secured, delay in enforcement is likely to be less prejudicial than in cases where his security is insufficient. 12 On an application for permission, the court will not seek to adjudicate upon a dispute over the existence, validity or nature of the security which the applicant is seeking permission to enforce unless the issue raises a short point of law which it is convenient to determine without further ado.

4.5  WHAT ARE THE OTHER CONSEQUENCES OF ADMINISTRATION? 4.5.1  What is the effect on a winding-up petition? Under para 40(1) Sch B1 IA 1986, a winding-up petition: •

will be dismissed when an administration order is made in respect of the company; and

•

will be suspended whilst the company is in administration following an outof-court appointment by a QFCH. In practice, the suspension means that it has no legal effect during the administration, so dispositions of the company’s property will not be void under s 127 IA 1986 (discussed in Chapter 5, and see Re J Smiths Haulage Ltd [2007] BCC 135).

The exceptions in relation to a moratorium described in Section 4.4.1.1 also apply here (para 40(2) and (3) Sch B1 IA 1986).

4.5.2  What is the effect on a receiver? An administration order will cause any administrative receiver to vacate office. Whilst administration will not automatically cause a non-administrative receiver to vacate office, they are obliged to do so if the administrator so requires (para 41 Sch B1 IA 1986). 111

4.5  Administration

4.5.3  What is the effect on the directors? The power of the administrator to appoint and remove directors is discussed in Section 4.7. The role of the directors in an administration is discussed further in Chapter 6. However, the directors cannot exercise any powers that might interfere with the administrator’s conduct of the administration without the administrator’s prior consent (para 64 Sch B1 IA 1986). In the majority of cases, the administrator will prefer not to allow the directors any further role in managing the business. However, in certain administrations, an administrator may be prepared to allow the directors to continue to exercise management powers to continue to trade the business. Such an arrangement known as a ‘light touch administration’. The administration of Debenhams Retail Limited was one example of this and the judgment placing that company into administration specifically uses this phrase (see Re Debenhams Retail Ltd [2020] EWHC 921 (Ch) at para 20). Nevertheless, in any light touch administration, the administrators will wish to agree a written protocol with the directors stipulating which powers they may exercise and the constraints to which they will be subject. The Insolvency Lawyers Association and City of London Law Society devised and published a template form of protocol in 2020.

4.5.4  What is the effect on the company’s business and status? Unlike liquidation, administration does not oblige the company to cease to carry on business – this would be inconsistent with the purpose of administration. The administrator is indeed given wide powers which will allow them to continue to trade, as discussed in Section 4.7.

4.5.5  What is the effect on contracts? Administration does not terminate the contracts of a company. The terms of a contract itself may of course provide that it terminates automatically on administration or, more normally, that the other party has the right to terminate. However, such termination provisions will be subject to the provisions of s 233B IA 1986, as discussed further in Section 4.9. Alternatively, the administrator may indicate that the company is no longer able to perform its obligations under the contract, and the resulting breach will give the other party the ability to terminate and/or to pursue other remedies. The administration moratorium should not affect the other party’s ability to terminate the contract (see Section 4.4.1.2), but is likely to limit that party’s ability to pursue other remedies against the company. Damages are likely to be of limited benefit against an insolvent company. However, in certain cases applicants have been able to obtain injunctive relief against administrators (see, for example, Astor Chemicals Ltd v Synthetic Technology Ltd [1990]  BCC  97). In addition, where a counterparty to a contract could have obtained an order for specific performance prior to the administration, they might still be able to obtain such an order notwithstanding the administrator’s appointment (see Re A Wear UK Limited [2013] EWCA Civ 1626, which related to a contractual agreement to surrender a lease). Unlike a liquidator, an administrator has no ability to disclaim onerous contracts. 112

Administration 4.6

4.5.6  What is the effect on the company’s documentation? During the administration, every invoice, order for goods or services or business letter sent by or on behalf of the company or the administrator and every website of the company is required to state the name of the administrator and the fact that the affairs of the company are now under the administrator’s management. The administrator or any officer of the company will commit an offence if they authorise or permit a breach of this requirement without reasonable excuse (para 45 Sch B1 IA 1986).

4.6  HOW ARE THE CREDITORS INFORMED AND INVOLVED? 4.6.1  Methods of communication An administrator has quite extensive obligations to keep creditors informed. Given that in some administrations there may be a large number of creditors, many of whom will often be owed comparatively small sums, it would be a costly and timeconsuming exercise in itself to send letters by post to all creditors to give notice of the appointment and of the administrators’ proposals. Fortunately, administrators now have considerable scope to communicate with creditors by more cost-effective means. A document may be delivered to a creditor by electronic means rather than by post if the intended recipient has: •

given actual or deemed consent for the electronic delivery of that document;

•

not revoked that consent before the document is sent; and

•

provided an electronic address for delivery of the document.

An intended recipient is deemed to have consented to electronic delivery by an insolvency officeholder where the intended recipient and the company had customarily communicated with each other by electronic means before the insolvency proceedings commenced. This is a useful provision, intended to make delivery of notices easier for companies that would rarely, if ever, have communicated by post prior to their administration (r 1.45 IR 2016). The administrator may also deliver a notice to creditors containing a statement that either: •

a particular document will be made available for viewing and downloading on a website; or

•

future documents to be delivered generally during the course of the administration will be made available for viewing and downloading on a website without notice to the recipient.

Creditors are, however, given the right to request hard copies of documents made available on the website, and in the latter case specify that they wish to receive hard copies of all further documents made available there. In addition, an administrator cannot use a website to give notice of an intention to declare a dividend (s  246B IA 1986 and rr 1.49 and 1.50 IR 2016). Finally, creditors are entitled if they so wish to opt out of receiving notices from the administrator. The administrator is obliged in the first communication with a creditor to inform them in writing of their right to do so (s 246C IA 1986 and r 1.39 IR 2016). 113

4.6  Administration Opting out will not prevent that creditor from: •

receiving notice of a proposed distribution to creditors; or

•

participating in a decision procedure or deemed consent procedure even though (by virtue of being an opted-out creditor) they did not receive formal notice of it.

4.6.2  Notice of appointment In practice, the first communication the creditors will receive from the administrator is likely to be a notice that the administrator has been appointed. An administrator must send notice of their appointment to the company and to all creditors of the company of whose addresses they are aware (having obtained a list of creditors for this purpose) as soon as reasonably practicable. An administrator will typically aim to have complied with this latter requirement within 28 days after their appointment, although may well do so sooner. In addition, the administrator must send notice of their appointment to the Registrar of Companies within seven days and advertise their appointment in the Gazette and in such other manner as they think fit. They will also need to give notice to any receiver who is currently in office, any person who has presented a pending winding-up petition, any enforcement officer who is already charged with execution against the company’s property, anyone who has distained against the company’s property, and the supervisor of any CVA (para 46 Sch B1 IA 1986 and r 3.27 IR 2016).

4.6.3  Statement of affairs As soon as reasonably practicable after their appointment, the administrator may require one or more ‘relevant persons’ to provide a statement of affairs or statement of concurrence (para 47 Sch B1 IA 1986). This is discussed further in Chapter 6. The administrator is required to file copies of these with both the Registrar of Companies and the court. However, if the administrator thinks it would prejudice the conduct of the administration or might reasonably be expected to lead to violence against any person if the whole or part of the statement of affairs were to be disclosed, they may apply to the court for an order for limited disclosure (rr 3.44 and 3.45  IR  2016). Administrators have made such an application, for example, where they wish to avoid disclosing a full list of the names and addresses of the names of all creditors of the company because this list is in itself a valuable asset of the company (see Advent Computer Training Ltd [2010] EWHC 459 (Ch)).

4.6.4  Statement of proposals In every administration, the administrator must prepare a statement setting out their proposals for achieving the purposes of the administration (para 49 Sch B1 IA 1986). They may, for example, propose a CVA, a Scheme of Arrangement or a Restructuring Plan, although it is still more likely in most cases that the proposals will involve a business sale. Where applicable, this statement must contain an explanation of why the administrator thinks the primary or second objective of administration cannot be achieved (see Section 4.2.1). 114

Administration 4.6 As seen below, the administrator will need to consider their intended exit route even at the start of the administration, and set this out in their proposals to creditors. The various methods of ending an administration are discussed further in Section 4.11. It will sometimes be necessary to set out alternative scenarios. Should a CVA be proposed and the proposal passed, for example, the company would normally remain in administration throughout the duration of the CVA. However, the method of ending the administration is likely to depend on whether the CVA ultimately succeeds or fails. The administrator must send a copy of the statement of proposals to the Registrar of Companies, to every creditor whose claim and address they know of and to every member whose address they know of as soon as reasonably practicable and in any event within eight weeks of the date the company entered administration (although this time period can be extended in accordance with para  107 Sch B1  IA  1986). An administrator may apply for an order for limited disclosure of the statement of proposals in the same circumstances as were discussed in Section 4.6.3. Further details of the required content of this statement are set out in r 3.35 IR 2016, and among other things it will include: • an account of the circumstances giving rise to the administrator’s appointment; •

a copy or summary of the statement of affairs (or appropriate explanations and information if there is no statement or if a limited disclosure order has been made);

•

except where a CVA is proposed, an estimate of the value of the prescribed part and of the company’s net property. These estimates need not contain any information which if disclosed would seriously prejudice the company’s commercial interests, but if such information is excluded this must be stated. If the administrator proposes not to distribute any prescribed part, or to seek leave of the court not to do so, this must also be stated;

•

how it is envisaged that the purpose of the administration will be achieved, and the proposed exit route. If the proposed exit route is a voluntary liquidation, details of the proposed liquidator must be included; and

•

the manner in which the affairs of the company have been (and will continue to be) managed and financed, including the reasons for and details of any disposal of assets already made.

The statement of the proposals must also contain various details of: •

the proposed basis for fixing the administrator’s remuneration (r  3.35(9) IR 2016); and

• any pre-administration costs charged or incurred by the administrator (rr 3.35(10) and 3.36 IR 2016). Remuneration and costs are discussed further in Section 4.10.3. However, the proposals may not include any action which affects the right of secured creditors to enforce their security, or which would result in: • a preferential debt being paid otherwise than in priority to non-preferential debts; •

an ordinary preferential debt being paid otherwise than in priority to any secondary preferential debts; or 115

4.6  Administration •

one preferential creditor being paid a smaller proportion of its debt than another.

These restrictions will not apply if the creditor concerned consents, or the proposal involves the company entering into a CVA, a Scheme of Arrangement or a Restructuring Plan on the basis that these processes contain their own protections for these creditors (para 73 Sch B1 IA 1986). If for any reason no statement of affairs is provided, the proposals themselves must include the names, addresses and debts of the creditors, including details of any security held. However, as would have been the case in relation to the statement of affairs, if the administrator thinks it would prejudice the conduct of the administration or might reasonably be expected to lead to violence against any person if this information were to be disclosed they may apply to the court for an order for limited disclosure (rr 3.44 and 3.45 IR 2016).

4.6.5  Initial creditors’ decision 4.6.5.1  Approving the administrator’s proposals The administrator is required to seek a decision from the creditors as to whether they approve the administrator’s proposals and must give notice to creditors of the decision process at the same time as they deliver the proposals to the creditors (para 51 Sch B1 IA 1986 and r 3.38 IR 2016). The initial decision date set must be within ten weeks of the date the company entered administration (although this time period can be extended in accordance with para 107 Sch B1 IA 1986). The creditors may approve the proposals without modification, or with any modification to which the administrator consents (para 53 Sch B1 IA 1986). Approval of the proposals is likely to have implications for the remainder of the administration. As seen in Section 4.11.3, it may, for example, allow the administration ultimately to end by a CVL with no further creditors’ decision being required.

4.6.5.2  Giving notice to the creditors The administrator must deliver a notice to the creditors seeking their decision on the proposals by either: •

the deemed consent procedure; or

•

a decision procedure,

in either case stipulating the decision date. Rule 15.8  IR  2016 contains a list of general requirements for notices to creditors where a decision is sought by a decision procedure. Amongst other things, the present notice must state: •

by when the creditor must have delivered a proof of debt in respect of their claim (failing which, their votes will be disregarded);

•

in the case of a meeting, that any proxy given by a creditor to allow another person to vote on their behalf at that meeting must be delivered to the convener or chair of that the meeting before it may be used at that meeting; and 116

Administration 4.6 •

that creditors who meet the thresholds in s  246ZE IA  1986 may request a physical meeting (as described further in Section 3.3.3.5).

The notice also needs to invite the creditors to decide whether a creditors’ committee should be established if sufficient creditors are willing to be members (para 57 Sch B1 IA 1986 and r 3.39 IR 2016). The creditors’ committee is discussed further in Section 4.10.2.

4.6.5.3  The possible decision-making processes The notice may stipulate any of the decision procedures prescribed in r 15.3 IR 2016 (other than a physical meeting), ie: • correspondence; •

electronic voting;

•

a virtual meeting; or

•

any other decision-making procedure which enables all creditors who are entitled to participate in the making of the decision to participate equally.

Electronic voting includes any electronic system which enable a person to vote without the need to attend at a particular location to do so (r 15.2(1)  IR  2016). A notice delivered to creditors must contain any necessary information as to how to access the voting system, including any password required. Except where electronic voting is being used at a meeting, the voting system must be capable of enabling a creditor to vote at any time between the notice being delivered and the decision date. During the course of the vote, it must not provide any creditor with information concerning the vote cast by any other creditor (r 15.4 IR 2016). A  virtual meeting means any meeting where persons who are not invited to be physically present together may nevertheless participate in the meeting, including communicating directly with all of the other participants in the meeting and voting either directly or via a proxy-holder (r 15.2(1)  IR  2016). In addition to the more general requirements described in Section 3.3.3.1, a notice delivered to creditors must contain any necessary information as to how to access the virtual meeting, including any telephone number, access code or password required. However, once in progress a virtual meeting will be procedurally similar to a physical meeting. Section 246A IA 1986 sets out various more general provisions in relation to meetings where the attendees are not physically present together. It is, in particular, the duty of the convener to make appropriate arrangements: •

to enable those attending the meeting to speak and to vote; and

•

to ensure the identification of those attending the meeting and the security of any electronic means used to enable attendance.

The deemed consent procedure is set out in s  246ZF IA  1986 and requires the relevant creditors to be given notice of: •

the matter about which they are being asked to make a decision;

•

the decision the person giving the notice proposes should be made;

•

the circumstances in which the decision will be deemed to have been made (or not made); and

•

the procedure for objecting. 117

4.6  Administration If less than 10% by value of the creditors who would be entitled to vote object, then the decision will be deemed to be made. If 10% or more in value do object, however, the administrator will instead need to use a decision procedure (s 246ZF(5)(b) IA 1986). Creditors must have submitted a proof of debt by the decision date in order to be entitled to object. The process of placing a value on creditor claims, to determine which creditors can object, is the same as that discussed in Section 4.6.5.5.

4.6.5.4  When is a physical meeting still required? The administrator must still summon a physical meeting of creditors in place of any other procedure if any of: •

10% by value of the creditors (including the value of any secured debt); or

•

10% in number of the creditors; or

•

10 creditors,

make a request in writing that the administrator should do so (s 246ZE(3) and (6)). For obvious reasons, this has become known as the ‘rule of 10’. The creditors must, however, make their request no later than five business days after the date on which the administrator sent their notice to the creditors seeking their decision. When convening a physical meeting, the administrator may still permit a creditor to attend that meeting remotely if they receive a request in advance to do so (r 15.6(6) IR 2016).

4.6.5.5  Voting and valuing claims for voting purposes Rules 15.20 to 15.35  IR  2016 set out the procedures for the calculation of voting rights, for determining when a resolution is passed and for virtual or physical meetings more generally. However, an overview of the procedures which apply to an administration is given here. The rules refer to the person who seeks the decision as the ‘convener’ and the person who presides over any meeting as the ‘chair’, although the administrator will in practice ordinarily fulfil both of these functions. A resolution will be passed when a majority by value of those present and voting have voted in favour. However, this is subject to a protection for unconnected creditors to prevent them being out-voted by creditors connected with the company – a decision will not be made if those voting against include more than half in value of the creditors to whom notice of the decision procedure was delivered who are not, to the best of the convener’s belief, connected with the company (r 15.34 IR 2016). The meaning of ‘connected’ is discussed in Section 5.8. A creditor will only be entitled to vote if a proof of its debt and (if relevant) a proxy appointing its representative have been received by the convener no later than the decision date or, in the case of a meeting, by 4 pm on the business day before the meeting. However, in the latter case the chair has a discretion to allow the creditor to vote notwithstanding non-compliance with this (r 15.28 IR 2016). A  creditor is entitled to vote on an unliquidated debt, or one whose value is unascertained, if the convener or chair agrees to put upon it an estimated minimum value for the purposes of entitlement to vote and admit the claim for that purpose (r 15.31(2) IR 2016). In HMRC v Maxwell [2010] EWCA Civ 1379, the Court of 118

Administration 4.6 Appeal indicated the chair must do their best to assess the minimum value of the claim. The chair also has a general discretion to accept or reject proofs although, in situations of doubt, the proper course is to mark the vote as ‘objected to’ and to allow the creditor to vote (r 15.33 IR 2016). The vote may subsequently be declared invalid if the objection is sustained. There is a right to appeal to the court against a chair’s decision and the court may make such order as it thinks just (r 15.35 IR 2016). As can be seen, the decision to accept or reject a proof for voting purposes is made on a comparatively ad hoc basis. It is not conclusive for other subsequent purposes, such as that of establishing the value of the claim for dividend purposes. Secured creditors are generally only able to vote in respect of the balance of their debt (if any) after deducting the value of their security. However, they will be entitled to vote in respect of the full value of their debt if the administrator has stated that the company has insufficient property to allow any distribution to unsecured creditors other than the prescribed part, as discussed further in Section 4.6.5.7 (r 15.31(4)–(6) IR 2016).

4.6.5.6  How do proxies work? As noted in Section 4.6.5.5, a proxy will be required if a creditor wishes another individual to attend a virtual or physical meeting on their behalf. Rules 16.1 to 16.9 IR 2016 deal specifically with proxies. That proxy may direct the proxy-holder how to act at that meeting by giving specific instructions. This may be the creditor’s preferred approach where they wish simply to appoint the chair of the meeting as their proxy. Where the creditor’s own representative will attend, however, it may be wiser to submit a proxy that allows the representative to vote according to their discretion, as this allows for greater flexibility. It is possible also for a creditor to submit a blank proxy which contains neither the name of a proxy-holder nor instructions as to how the person will act, but containing a note to the effect that the proxy may be completed with the name of the person or the chair of the meeting who is to be proxy-holder (r 16.3 IR 2016).

4.6.5.7  Dispensing with the initial creditors’ decision The administrator may dispense with an initial creditors’ decision if their proposals state that: •

the company has sufficient property to allow each creditor to be paid in full; or

•

the company has insufficient property to allow any distribution to unsecured creditors other than the prescribed part; or

•

neither the primary nor the second objective of administration can be achieved.

The proposals must also state the administrator’s reason for deciding not to call a meeting, and they must still call a meeting if this is requested by creditors whose debts amount to at least 10% of the total debts of the company (para 52 Sch B1 IA 1986).

4.6.5.8  What happens after the meeting? After the conclusion of the meeting, the administrator must as soon as reasonably practicable report any decision taken to the court, the Registrar of Companies, 119

4.6  Administration the company’s creditors and any other person to whom the proposals were sent (para 53(2) Sch B1 IA 1986 and r 3.41 IR 2016). The administrator is not entitled to make any substantial amendment to the agreed proposals without first obtaining the creditors’ consent by way of a further decision from the creditors (para  54 Sch B1  IA  1986). If there is doubt as to whether an amendment is ‘substantial’, the administrator may conceivably seek directions from the court on the point under para 63 Sch B1 IA 1986 to avoid the time and expense of seeking a decision. Under para  68(3) Sch B1  IA  1986, the court is only able to give directions in connection with the administrator’s management of the company’s affairs, business or property, however, if: •

no proposals have been approved;

•

the directions are consistent with any approved proposals; or

•

the court thinks the directions are required to reflect a change in circumstances since an earlier approval of proposals, or are desirable because of a misunderstanding about any approved proposals.

It is unclear whether the court has any residual discretion to authorise an administrator to make substantial amendments in any other circumstances.

4.6.5.9  What happens if the proposals are rejected? If the creditors have rejected the administrator’s proposals (or any revised proposals), the court may order that the administrator’s appointment will cease to have effect, or adjourn the hearing, or make an interim order, or make an order on a petition for winding-up or make such other order as it considers appropriate (para  55 Sch B1 IA 1986). In Fortuna Fix Ltd (in administration) [2020] EWHC 2369 (Ch) the court held that it had the jurisdiction to make a winding-up order notwithstanding that no winding-up petition had been presented. Depending on the circumstances, the court may use its powers to allow the administrator time to formulate new proposals which are more likely to be accepted. The court may be reluctant to impose a set of proposals on the creditors against the will of the majority, but it may still do so, for example, where a single creditor holding a majority in value had blocked proposals supported by the majority in number (Re Structures & Computers Ltd [1998] BCC 348, as applied in DKLL Solicitors v Her Majesty’s Revenue & Customs [2007] BCC 908).

4.6.6  Progress report In addition to reports made to any creditors’ committee and to the information about distributions described elsewhere in this chapter, at the end of the first six months (and at the end of each subsequent period of six months), the administrator will need to send a progress report to the creditors and the Registrar of Companies including (amongst other things): •

a summary account of receipts and payments;

•

details of the administrator’s remuneration and expenses; and 120

Administration 4.7 •

details of what remains to be done.

(r 18.6 IR 2016) At the end of the administration process, the administrator will also need to send out a final account. The process for determining the administrator’s remuneration and expenses is discussed further in Section 4.10.3.

4.7  DUTIES OF THE ADMINISTRATOR 4.7.1  What are an administrator’s general duties? The administrator must: •

exercise their powers in the interests of the company’s creditors as a whole, subject to any special considerations when pursuing the third objective only (para 3(2) Sch B1 IA 1986);

•

perform their functions as quickly and efficiently as is reasonably practicable (para 5 Sch B1 IA 1986;

•

on their appointment, take custody and control of all of the property to which they think the company is entitled (para 67 Sch B1 IA 1986); and

•

manage the company’s affairs, business and property in accordance with any proposals which have been approved by the creditors, and any directions given by the court (para 68 Sch B1 IA 1986).

Other common law duties akin to those of a liquidator described in Chapter 3 might also be regarded, broadly speaking, as applicable to an administrator. The main example in practice of an administrator’s duty to exercise reasonable skill and care is their duty to take reasonable care to obtain the best price which the circumstances of the case permit on the sale of an asset. This is generally similar to the duty owed by a receiver (see Chapter 8). However, unlike a receiver, an administrator must also take reasonable care in choosing the time of the sale as they have no overriding duty to give priority to the interests of any appointor (see Re Charnley Davies Ltd (No 2) [1990] BCLC 760, Silven Properties Ltd v Royal Bank of Scotland plc [2004] 4 All ER 484 and Davey v Money [2018] EWHC 766 (Ch) (at paras 381 to 393)). In PJSC Urakali v Rowley [2020] EWHC 3442 (Ch), the court confirmed, however, that the administrator’s common law duties on a sale do not extend to a duty of care to a rival bidder. Like a liquidator in a compulsory liquidation, an administrator is an officer of the court. Like a liquidator, an administrator also has a duty, when exercising their powers, to act fairly and honourably and not merely to rely upon their strict legal rights, as per the rule in ex parte James (see Section 3.7.3).

4.7.2  How might an administrator’s actions be challenged? 4.7.2.1  Challenge to conduct A creditor or member may apply to the court claiming that either: 121

4.7  Administration •

the administrator has acted, is acting or proposes to act in a way which unfairly harms, or would unfairly harm, its interests (whether alone or in common with other members or creditors) (para 74(1) Sch B1 IA 1986); or

•

the administrator is not performing their functions as quickly and efficiently as is reasonably practicable (para 74(2) Sch B1 IA 1986).

In Re Lehman Brothers International (Europe) Limited [2008] EWHC 2869 (Ch), it was emphasised that for a claim under para  74(1), the harm suffered must be unfair. In Re Coniston Hotel (Kent) LLP  [2013]  EWHC  93 (Ch), the court held that unfairly harmed would ordinarily mean ‘unequal or differential treatment to the disadvantage of the applicant (or applicant class) which cannot be justified by reference to the interests of the creditors as a whole or to achieving the objective of the administration’. As such, an administrator will often be entitled to harm the interests of individual creditors if their actions are genuinely aimed at improving the position of creditors as a whole. The court may grant relief, dismiss the application, adjourn the hearing conditionally or unconditionally, make an interim order or make any other order it thinks fit. However, an order may in particular: •

regulate the administrator’s exercise of their functions;

•

require the administrator to do or not do a specified thing;

•

require a creditors’ meeting to be held for a specified purpose; or

•

provide for the appointment of the administrator to cease to have effect.

An order may be made on an ‘unfair harm’ claim notwithstanding that the action complained of was within the administrators’ power, or was taken in reliance on an order under para 71 or 72 Sch B1 IA 1986 (see Section 4.8.3). However, no order may be made if it would prevent the implementation of a CVA, Scheme of Arrangement or Restructuring Plan (where creditors enjoy their own separate protection) or of proposals or revisions approved more than 28 days before the application was made. The ability of creditors to remove an administrator under para 88 Sch B1 IA 1986 is also separately discussed in Section 4.10.5.

4.7.2.2 Misfeasance Under para  75 Sch B1  IA  1986, the Official Receiver, a liquidator, a subsequent administrator, a creditor or a member may apply to the court where they allege that the administrator: •

has misapplied or retained money or other property of the company;

•

has become accountable for money or other property of the company;

•

has breached a fiduciary or other duty in relation to the company; or

•

has been guilty of misfeasance.

The court may examine the administrator’s conduct and order them to repay, restore or account for money or property, to pay interest, or to contribute a sum to the company’s property by way of compensation for breach of duty or misfeasance. As a general principle, the administrator does not owe a duty to individual creditors and any recovery under this provision will be for the general benefit of all creditors (Oldham v 122

Administration 4.8 Kyrris [2004] BCC 111, which decision since been approved by the Court of Appeal in Fraser Turner Limited v PricewaterhouseCoopers LLP [2019] EWCA Civ 1290).

4.7.2.3  The rule in ex parte James This rule could provide an alternative basis of a challenge in appropriate circumstances. The applicant would, in effect, be requesting the court to exercise its jurisdiction to control the conduct of its officer. The Court of Appeal reconsidered the rule in Lehman Brothers Australia Limited (in liquidation) v Macnamara [2020]  EWCA  Civ 321. The respondents were the administrators of LBIE. The applicant had submitted its proof for too low an amount, due to LBIE’s clerical staff having provided it with erroneous information. The administrators had accepted that there had been an error but had refused to agree to vary the proof, citing the fact that the applicant had signed a claims determination deed releasing any further claims it may have. The court held that the test under the rule in ex parte James was whether the administrators were acting unfairly in seeking to uphold their strict legal rights, rather than whether they were acting unconscionably or dishonourably which could impose a higher bar. The court was accordingly willing to allow the applicant’s challenge. However, the court also made it clear that the application of the rule should be kept within strict bounds.

4.8  POWERS OF THE ADMINISTRATOR 4.8.1  General powers The administrator may do anything necessary and expedient for the management of the affairs, business and property of the company (para 59(1) Sch B1 IA 1986). Their powers are accordingly not restricted to the management of the business, unlike the powers of the directors. In addition, para 60 Sch B1 IA 1986 gives an administrator the wide powers contained in Sch  1  IA  1986. These powers are set out in Table 4.5. However, para 60 makes it clear that any powers to sell, hire out or otherwise dispose of property are expressly subject to any regulations that may be made under para 60A. The relevant regulations are discussed in Section 4.12. Any person dealing with an administrator in good faith and for value need not enquire whether the administrator is acting within their powers (para 59(3) Sch B1 IA 1986). Like a liquidator, the administrator has the power to assign various of the rights of action which they have by virtue of being the administrator, as detailed further in Chapters 5 and 6. This provides another way of monetarising right of actions where it would be difficult for the administrator to find funding to bring proceedings (s 246ZD IA 1986). The administrator is also given powers: • to remove or appoint a director of the company (para 61 Sch B1 IA 1986); • to call a meeting of the members of the company or to seek a decision on any matter from the company’s creditors (para 62 Sch B1 IA 1986); and • to apply to the court for directions in connection with the carrying out of their functions (para 63 Sch B1 IA 1986). 123

4.8  Administration The courts have made it clear that the wide nature of the administrator’s general powers should make it unnecessary, in many cases, for directions to be sought in respect of commercial or administrative matters, particularly where urgent action is required in the interests of the company and its creditors. Thus, in appropriate circumstances, the administrator has the power to sell the company’s business without the prior approval of the creditors or the permission of the court (see Re T & D Industries Plc [2000] 1 WLR 646 and Re Transbus International Ltd [2004] 1 WLR 2654). This will be particularly relevant in the case of a pre-pack (see Section 4.12). Nevertheless, in Nortel Networks UK Limited [2016] EWHC 2769 (Ch) the court was prepared to give directions to allow the administrators to enter into a compromise agreement which was particularly momentous, and outlined the considerations which a court should apply before giving this type of direction. The court should be concerned to ensure that the proposed exercise was within the administrators’ powers, that the administrators genuinely held the view that what they proposed would be for the benefit of the company and its creditors, and that they were acting rationally and without being affected by a conflict of interest in reaching that view. Similarly, in Re Petropavlovsk plc (in administration) [2022] EWHC 2097 (Ch) the court held that the administrators were justified in seeking directions where there was a risk of breaching sanctions legislation and where the transaction was complex with a sale price substantially below the company’s book value. Table 4.5 – Powers of an administrator 1

To take possession of, collect and get in the property of the company and, for that purpose, to take such proceedings as may seem to them expedient.

2

To sell or otherwise dispose of the property of the company by public auction or private auction or private contract.

3

To raise or borrow money and grant security therefor over the property of the company.

4

To appoint a solicitor or accountant or other professionally qualified person to assist them in the performance of their functions.

5

To bring or defend any action or other legal proceedings in the name of and on behalf of the company.

6

To refer to arbitration any question affecting the company.

7

To effect and maintain insurances in respect of the business and property of the company.

8

To use the company’s seal.

9

To do all acts and to execute in the name and on behalf of the company any deed, receipt or other document.

10

To draw, accept, make and endorse any bill of exchange or promissory note in the name and on behalf of the company.

11

To appoint any agent to do any business which they are unable to do themselves or which can more conveniently be done by an agent and to employ and dismiss employees.

12

To do all such things (including the carrying out of works) as may be necessary for the realisation of the property of the company.

13

To make any payment which is necessary or incidental to the performance of their functions.

14

To carry on the business of the company.

15

To establish subsidiaries of the company.

124

Administration 4.8 16

To transfer to subsidiaries of the company the whole or any part of the business and property of the company.

17

To grant or accept a surrender of a lease or tenancy of any of the property of the company, and to take a lease or tenancy of any property required or convenient for the business of the company.

18

To make any arrangement or compromise on behalf of the company.

19

To call up any uncalled capital of the company.

20

To rank and claim in the bankruptcy, insolvency, sequestration or liquidation of any person indebted to the company and to receive dividends, and to accede to trust deeds for the creditors of any such person.

21

To present or defend a petition for the winding-up of the company.

22

To change the situation of the company’s registered office.

23

To do all other things incidental to the exercise of the foregoing powers.

4.8.2  Power to make distributions and payments Under para  65 Sch B1  IA  1986, the administrator is given the power to make distributions to creditors. This includes the power to distribute the prescribed part to unsecured creditors. However, the administrator is not otherwise entitled to make a distribution to a creditor who is neither secured nor preferential without the permission of the court. This power is expressly subject to the priority status of preferential creditors (see Chapter 2). Provided the court is willing to grant permission, however, the administrator will be able to make a general distribution to all unsecured creditors or to any class of them (a ‘distributing’ administration). Rules 14.1 to 14.45 IR 2016 cover this process in the same way as has already been described for a liquidation (see Chapter 3). The unsecured creditors will receive appropriate notice that the administrator is proposing to make a distribution (r 14.28 IR 2016) and can then take any further action they think necessary. However, it seems that distributing administrations remain the exception rather than the norm. In addition, under para  66 Sch B1  IA  1986, the administrator is given the power to make a payment otherwise than in accordance with para 65 Sch B1 IA 1986 or para 13 Sch 1 IA 1986 (see Table 4.5) if they think it likely to assist achievement of the purpose of administration. This power may be used, for example: •

to make duress payments to an essential supplier who stipulates the arrears must be paid off as a precondition of any future supply; and

•

to make payments to employees under the national laws of EU Member States to which they would not have been entitled under English insolvency law, thus avoiding the need for additional formal insolvency proceedings in other Member States (Re MG  Rover Espana [2006]  BCC  599 and Re Collins & Aikman Europe SA [2006] BCC 861).

Where the company entered administration before the end of the period of 12 weeks beginning with the day after the end of any Part A1 Moratorium, the administrator will need to have made a distribution in respect of all moratorium debts and priority pre-moratorium debts prior to making a payment under either para  65 or para  66 (para 64A Sch B1 IA 1986). The administrator will also need to ensure that they will have sufficient monies to meet all administration expenses and other sums ranking in priority to these under 125

4.8  Administration para  99 Sch B1  IA  1986 (see Section 2.4.4) before they can make a distribution to floating charge or unsecured creditors. In both Re WW  Realisations 1 Limited [2010] EWHC 3604 and Re Nortel Networks UK Limited [2017] EWHC 1429 (Ch) the court was prepared to help the administrators by directing that they were not required to make provision for administration expenses unless the relevant claims had been made by a specified cut-off or ‘bar’, date. Unlike a liquidator, an administrator has no power to make a distribution of surplus funds to members. In Lehman Brothers International (Europe) (in administration) [2020] EWHC 1932 (Ch) the administrators addressed this by re-appointing directors, and then obtaining permission from the court to consent to the directors making the relevant distribution. Some commentators still view this as an uncomfortable decision, however, as it is unclear how it can be genuinely reconciled with the three objectives discussed in Section 4.2.1. While LBIE was undoubtedly holding surplus funds by then, there were no wider plans to rescue it as a going concern and the administrators proposed to remain in office to address various other residual aspects of the administration.

4.8.3  Power to deal with charged or ‘hire purchase’ property The administrator is entitled to dispose of property which is subject to a floating charge as if it were not subject to that security. The floating charge holder will then have the same priority in respect of the proceeds of sale as it had in the property sold (para 70 Sch B1 IA 1986). The administrator may, however, only dispose of property which is subject to a fixed charge (or any other type of security other than a floating charge) without the consent of the charge holder if they obtain an order from the court. The court may in turn only make such an order if it thinks that disposal of the property would be likely to promote the purpose of administration. In addition, any order is subject to the condition that: •

the net proceeds of disposal of the property; and

•

any additional money required to be added to the net proceeds so as to produce the amount determined by the court to be the net amount which would be realised on a sale of the property at market value,

be applied towards discharging the sums secured by the security (para  71 Sch B1 IA 1986). An example of such a case is O’Connell v Rollings [2014] EWCA Civ 639, where the Court of Appeal also recognised that there was a need to come to a decision quickly. Similar provisions to those which apply in relation to fixed charged property allow an administrator to dispose of goods which are in the possession of the company under a hire-purchase agreement (which for these purposes includes a conditional sale agreement, a chattel leasing agreement and a retention of title agreement), even though the company does not own that property (paras 72 and 111 Sch B1 IA 1986).

4.8.4  Power to require continuing supplies The legislation in this respect is discussed in Section 4.9. 126

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4.8.5  Specific powers of investigation The administrator has the same powers of investigation under ss 234 and 236 IA 1986 as a liquidator (see Chapter  3). The administrator will also be assisted by the directors’ and employees’ duty to co-operate with the insolvency officeholder under s 235 IA 1986 (see Chapter 6).

4.8.6  Powers to bring proceedings to swell the assets In addition to pursuing the company’s existing claims against third parties, the administrator shares many (but not all) of the powers of a liquidation to set aside transactions, as described in Chapter 5, and to pursue directors, as described in Chapter 6. The administrator also has the power to assign various of these rights of action, as detailed further in Chapters 5 and 6. This provides another way of monetarising rights of action where it would be difficult for the administrator to find funding to bring proceedings (s 246ZD IA 1986). In LF2 Ltd v Supperstone [2018] EWHC 1776 (Ch), a creditor challenged the administrators’ conduct for refusing to assign a claim which the administrators themselves believed had no chance of success and which they believed would just be used by the buyer to harass a third party. The court noted that there would be cases where it was clear that a claim was hopeless but suggested that where an administrator did not have a clear view of the prospects of success, perhaps because they lacked the resources fully to investigate the claim, they ought still to be prepared to seek a proper price for the claim.

4.8.7  Joint administrators More than one person is entitled to act as administrator. The fact that there are two or more joint administrators does not automatically mean that each administrator needs to sign a document or authorise any other action for it to be effective. Provided the administrator’s appointment so states, any act required or authorised to be done by the administrator can be done by either one or more of any joint administrators holding office (para 100(2) Sch B1 IA 1986). Usual practice is to have joint administrators, so that if one is unavailable another can act.

4.8.8  Consequence of agency The administrator is the agent of the company. As such, they have the power to bind the company as its agent without personal liability (para 69 Sch B1 IA 1986). When executing documents during the administration, therefore, the administrator signs in the company’s name rather than their own name. However, as a matter of caution the administrator will usually still include a provision excluding their personal liability and will therefore usually also be a separate party to the document in their own right solely to receive the benefit of this provision.

4.9  PROTECTION OF SUPPLY CONTRACTS 4.9.1  What are the relevant provisions? There are now several relevant sections of the IA 1986 which protect supplies to a company which has entered into administration, as a result of the legislation having been broadened over the years. They are: 127

4.9  Administration •

section 233  IA  1986, which prevents providers of utilities, communication services and certain other IT services from exploiting their position by insisting on the payment of pre-appointment arrears as a precondition of further supply;

•

section 233A IA 1986, which supplements s 233 IA 1986 by preventing the providers of the above services from relying upon insolvency-related terms to terminate the relevant contract or to do ‘any other thing’;

•

section 233B IA 1986, which prevents the providers of other goods and services from exploiting their position or from relying upon insolvency-related terms to terminate the contract or to do any other thing.

Sections 233 and 233A IA 1986 remain relevant notwithstanding the introduction of s 233B as the different sections are designed to complement each other rather than to overlap. The legislation specifically provides that s 233B(7) IA 1986, described in Section 4.9.4.4, does not apply to types of supplies already covered by s  233 and that s 233B(3) and (4), described in Sections 4.9.4.1 and 4.9.4.2, do not apply to contracts already covered by s 233A (see Part 1 Sch 4ZZA IA 1986).

4.9.2  Section 233 IA 1986 Section 233 IA 1986 applies to: •

supplies of gas;

•

supplies of electricity;

•

supplies of water;

•

supplies of communications services; and

•

supplies of certain other goods and services, including: (a) point of sale terminals; (b) computer hardware and software; (c) information, advice and technical assistance in connection with the use of information technology; (d) data storage and processing; and (e) website hosting.

Should the administrator request that the providers of these essential goods or services continue to supply the company in administration, those providers will not be entitled to insist as a condition of giving that supply, or do anything which has the effect of making it a condition of giving that supply, that any outstanding charges arising prior to the administration are paid. However, this is subject to a requirement that, if the supplier so requests, the officeholder will personally guarantee that payment to that supplier which accrue during the period of the administration are paid in full.

4.9.3  Section 233A IA 1986 Section 233A IA 1986 expands the protections in relation to the essential goods or services described in s 233 IA. Provided the contract for the supply of the relevant essential goods or services was entered into after 1 October 2015, it provides when a company enters administration any ‘insolvency related term’ of the contract will cease to have effect. For these purposes, an insolvency related term means a provision of the contract under which: 128

Administration 4.9 •

the contract or supply would terminate, or any other thing would take place, because the company entered into administration;

•

the supplier would be entitled to terminate the contract or the supply, or do any other thing, because the company enters administration; or

•

the supplier would be entitled to terminate the contract or the supply, or do any other thing, because of an event which took place before the company enters administration.

The meaning of the words ‘any other thing’ is discussed in Section 4.9.4.1. However, the supplier will still be entitled to terminate the contract or the supply (as applicable) if: •

the administrator consents to the termination of the contract;

•

the supplier successfully applies to court for an order that the contract is terminated on the ground that continuing to supply is causing them hardship;

•

any charges in respect of the supply that are incurred after the company entered administration are not paid within 28 days of their due date; or

•

the supplier indicates that it intends to terminate the supply unless the administrator gives a personal guarantee that the charges from the start of the administration will be paid and the administrator fails to give this within 14 days of receipt of this notice.

4.9.4  Section 233B IA 1986 4.9.4.1  Restrictions on termination due to the administration Under s 233B(3) IA 1986, when a company enters administration a provision of a contract for the supply of goods or services to the company ceases to have effect if and to the extent that, under the provision: •

the contract or the supply would terminate, or any other thing would take place, because the company entered administration; or

•

the supplier would be entitled to terminate the contract or the supply, or to do any other thing, because the company entered administration.

Despite the fact that the words ‘any other thing’ had been used in s 233A IA 1986 for some years prior to their being used in s 233B, there has as yet been no case law as to what they mean. However, it seems clear that they will, for example, prevent a supplier from raising prices, requiring upfront cash payment or imposing other more onerous contractual terms on the company as a result of it having entered administration.

4.9.4.2  Restrictions on termination for past breaches Furthermore, under s 233B(4) IA 1986, where: •

under a provision of a contract for the supply of goods or services to the company the supplier is entitled to terminate the contract or the supply because of an event occurring before the start of the insolvency period; and 129

4.9  Administration • the entitlement arises before the start of that period, the entitlement may not be exercised during that period. ‘Insolvency period’ for these purposes is defined in s  233B(8)  IA  1986. It begins when the company enters administration and ends when the appointment of the administrator ceases to have effect under paras 76 to 84 Sch B1 IA 1986 or as a result of an order under s 901F CA 2006 (see Section 4.11). Suppliers are therefore prevented from terminating supply contracts based on past breaches which are unconnected with the company’s administration where they have not already exercised their right to terminate before the start of the administration. Consequently, it is much more difficult for suppliers to terminate contracts once the company has entered administration. Nevertheless suppliers will still be able to terminate as a result of new breaches which only occur after the start of the administration, such as non-payment for goods supplied during the course of the administration.

4.9.4.3  No ability to seek a guarantee Unlike s 233A IA 1986, there is no ability under s 233B IA 1986 to seek a guarantee from an administrator as a condition of future supply.

4.9.4.4  No ability to require pre-administration debts be paid Suppliers are prevented from requiring that any outstanding charges which relate to the period before the administration are paid as a condition of future supply (s 233B(7) IA 1986).

4.9.4.5  What is a contract for the supply of goods and services? There is no definition of a contract for the supply of goods or services. The explanatory notes to CIGA 2020 (which introduced s 233B IA 1986) do, however provide some guidance regarding the types of contracts which would fall within the scope of this section, and state (at para 231) that: ‘A  contract is only subject to section 233B if it is a contract for the supply of goods and services. Agreements such as licenses, property leases and agreements for the sale of land or property are not characterised as contracts for the supply of goods and services, therefore they are not covered by the provisions of s 233B. A sophisticated lease/license/sale agreement may contain an element of provision for the supply of goods and services; this element would be covered by s 233B. The remainder of the lease/license/sale agreement will not be affected.’ Whilst it is therefore clear that licenses and agreements for the sale or lease of property are not covered by s 233B, there is scope for certain types of agreement to be only partially covered by s 233B where those agreements contain both a proprietary element and a supply of goods and services. Such agreements may include leases of serviced offices (which contain both a lease of a property and a supply of services to the tenant), whereby the supplier would be prevented from terminating the provisions of the agreement which relate to the supply of services, but would be entitled to terminate or forfeit the lease. 130

Administration 4.10

4.9.4.6  When might a supplier still terminate? Section 233B(5)  IA  1986 provides that where a provision of a contract ceases to have effect or an entitlement under a provision of a contract is not exercisable under s 233B the supplier may nevertheless terminate the contract if: •

the administrator consents to the termination of the contract; or

•

the court is satisfied that the continuation of the contract would cause the supplier hardship and grants permission for the termination of the contract.

An administrator will, as an officer of the court, be required to act reasonably and in good faith when considering any request for a contract to be terminated. Consequently, if the company does not require the goods or services which are supplied under the contract during the period of the relevant insolvency process, it is likely that the administrator will agree to a termination of the contract. In the absence of a consensual termination of the contract, the supplier is able to apply to the court for an order that the continuation of the contract is causing it hardship and should therefore be terminated. What constitutes ‘hardship’ is not defined and is therefore likely to be determined by the courts on a case-by-case basis. However, the explanatory notes to CIGA 2020 indicate that ‘hardship’ is likely to be interpreted to entail the risk of the supplier itself becoming insolvent if it is not allowed to terminate the contract.

4.9.4.7  Excluded contracts In addition to the contracts which are excluded from s 233B IA 1986 because they continue to fall within the scope of ss 233 and 233A IA 1986, Schedule 4ZZA to IA 1986 sets out certain further exclusions. In this regard: •

Part 2 excludes contracts where the supplier is one of listed type of persons. These persons include insurers, banks and a range of other providers of financial services;

•

Part 3 excludes certain listed types of financial contracts, derivatives contracts and contracts forming part of capital market investments; and

•

Part 4 excludes certain set off and netting arrangements and aircraft leasing arrangements.

During the Covid-19 pandemic, there were also temporary provisions in place to protect suppliers which were ‘small entities’ (s 15 CIGA 2020). However, as these only now apply where the company entered into the relevant formal insolvency procedure on or before 30 June 2021, they are not discussed further here.

4.10  SUPERVISION OF THE ADMINISTRATOR 4.10.1  Calling for a decision It is intended that control should lie largely with the creditors. Among other things, under para 56 Sch B1 IA 1986 an administrator of a company is required to seek a decision from the company’s creditors on a matter if: •

at least 10% by value of the unsecured creditors request that they do so; or

•

they are directed by the court to do so. 131

4.10  Administration

4.10.2  The creditors’ committee As previously described, a creditors’ committee may also be set up to avoid the need for all creditors to continue to be involved in this process. The committee will consist of between three and five creditors, and usually a representative sample of different types of creditor will be chosen. The committee may require the administrator to attend upon it at any reasonable time of which the administrator is given seven days’ notice and to provide it with information about the exercise of the administrator’s functions (para 57 Sch B1 IA 1986). Further details of how the creditors’ committee is formed and how it will then operate are set out in rr 17.3 to 17.27 IR 2016. It will amongst other things: •

fix and approve the administrator’s remuneration (see Section 4.10.3); and

•

grant the administrator’s discharge at the end of their appointment.

4.10.3  Determining the administrator’s remuneration As noted above, it is for the creditors’ committee to determine the basis of the administrator’s remuneration. However, if there is no creditors’ committee: •

the basis of the administrator’s remuneration will normally need to be fixed by all of the creditors by way of one of the decision procedures described in Section 4.6.5.3 (it is not possible for the administrator’s remuneration to be determined via the deemed consent procedure); but

•

if the administrator has stated that the company has insufficient property to allow any distribution to unsecured creditors other than the prescribed part (see Section 4.6.5.7), the basis of remuneration will instead be fixed by the consent of each of the secured creditors and, in addition (if the administrator has made or intends to make a distribution to preferential creditors), a decision of the preferential creditors.

The basis of remuneration may be fixed: •

as a percentage of the value of the assets realised and/or distributed;

•

by reference to time incurred; or

•

as a set amount.

Where, as will most often be the case, the administrator proposes to take remuneration by reference to time incurred, they will also need to provide a fee estimate and details of expenses which will or are likely to be incurred. The creditors’ committee (or creditors, as the case may be) will make their initial determination on the basis of this estimate (r 18.18 IR 2016). The administrator will need to seek further approval before they are able to draw fees in excess of their initial estimate (r 18.30 IR 2016). A secured creditor, or any unsecured creditor either with the concurrence of 5% in value of the unsecured creditors (including itself) or the permission of the court, may make a written request to the administrator for further information about remuneration or expenses set out in a progress report or final report (r 18.9 IR 2016). A  secured creditor, or any unsecured creditor either with the concurrence of 10% in value of the unsecured creditors (including itself) or the permission of the court, may also apply to the court on the grounds that the basis fixed for the 132

Administration 4.10 administrator’s remuneration is inappropriate, or that the remuneration charged and/ or expenses incurred by the administrator are, in all the circumstances, excessive (r 18.34 IR 2016).

4.10.4  The role of the court It is possible for a creditor to apply to the court for directions as to how the administrator may perform their functions (para 68 Sch B1 IA 1986). However, in Re Lehman Brothers International (Europe) Limited [2008] EWHC 2869 (Ch) (already discussed in Section 4.7.2), the court indicated that, where there was no suggestion that the administrator was acting improperly, it would be disinclined to interfere in the day-to-day management of the administration.

4.10.5  Removal of the administrator The creditors are entitled to apply to the court for the removal of the administrator and for another administrator to be appointed in their place (para 88 Sch B1 IA 1986). Such an application succeeded in Clydesdale Financial Services Limited v Smailes [2009] 1745 (Ch) where it enjoyed the support of the majority of the creditors. However, in Finnerty v Clark [2011] EWCA Civ 858, the court made it clear that, if an administrator was unbiased and entitled on the material before them to reach a relevant decision, that decision should be respected unless the court concludes otherwise – the fact that another administrator might reach a different decision was not a reason to remove the existing administrator. In Ve Vegas Investors IV LLC v Shinners [2018] EWHC 186 (Ch) the court gave a useful summary of the factors it will now take into account in deciding whether to remove an administrator. These include the following: •

the court will take account of the fact that removal will have an impact on professional standing and reputation;

•

a court will not remove an administrator simply because their conduct has fallen short of that which a court would regard as ideal; and

•

the court should consider the views of the majority of creditors but not necessarily view these views as conclusive.

In addition, where the administrator was appointed out of court by the company or its directors and there is no QFCH, they may be replaced by a decision of the creditors (para 97 Sch B1 IA 1986). As the administrator is obliged to instigate such a decision process if requested to do so (see Section 4.10.1), this would at first sight seem an unconditional method for removing an administrator. However, in Re Fortuna Fix Limited (in administration) [2020] EWHC 2369 (Ch), the administrators asked the court whether they were indeed required to seek a decision on their removal regardless of any other factors. The court found than in an appropriate case the administrators could apply for directions and be directed not to seek such a decision. The court noted that, although it would normally give weight to the views of the majority creditors, it would give them less weight in certain circumstances. The court noted that Raithatha v Holstein [2017] EWHC 3069 (Ch), a case where creditors seeking the removal of a liquidator were themselves facing claims against them by the liquidator (see Section 3.9.4) provided an example of such 133

4.11  Administration circumstances. The court’s concern will be the proper operation of the process of the administration and justice as between all those interested in the administration.

4.11  ENDING THE ADMINISTRATION 4.11.1 Overview The legislation provides seven possible methods for ending an administration. These methods reflect the fact that administration is generally intended to be a temporary step on the way to the company’s eventual survival or to some other process, although it is possible for an administration to be the last step in a company’s life. In practice, some of these methods described are used more commonly than others. It is still most likely that an administration will end with the company being placed into creditors’ voluntary liquidation (see Section 4.11.3).

4.11.2  Automatic end of administration Under para  76 Sch B1  IA  1986, if no other action is taken, the administrator’s appointment automatically ceases to have effect on the first anniversary of the date on which the administrator was appointed. This one-year period may be extended: • by creditors’ consent, but only once, only for a specified period not exceeding one year, and not if the period has already previously been extended by court order (paras 76(2)(b) and 78 Sch B1 IA 1986); or • by court order, for any period thought necessary (paras 76(2)(a) and 77 Sch B1  IA  1986). The court is, however, likely to require evidence that the administrator is complying with their duty to act as quickly and efficiently as possible and that the purpose of administration remains reasonably likely to be achieved. Paragraph 8.3 of the Insolvency Practice Direction 2020 makes it clear that, in the absence of special circumstances, an application for the extension of an administration must be made not less than one month before the end of the administration. The evidence in support of a later application must explain why it is late.

4.11.3  Moving from administration to CVL Where the administrator thinks that the total amount which each secured creditor is likely to receive has been paid to it or set aside for it, and that a distribution will be made to unsecured creditors (if any), they may convert the administration into a creditors’ voluntary liquidation (para 83 Sch B1 IA 1986). To do so, the administrator sends a notice to the Registrar of Companies (with copies to the court and to each creditor of whose name and address they are aware). On the date this notice is registered: •

the company is placed into creditors’ voluntary liquidation as if a members’ resolution in this effect had been passed on that date; and

•

the administrator’s appointment ends. 134

Administration 4.11 In Re Globespan Airways Limited [2012] EWCA Civ 1159, the Court of Appeal noted the difficulty that could potentially emerge if administrators lodged a conversion notice prior to the date the administration was due to expire, but it was not registered until after this date. The court addressed this by finding that the administrators’ term of office was automatically extended by implication until the date of registration. The liquidator will be either the person previously nominated as such by the creditors when the administrator’s proposals were passed or, if no-one has been nominated, the administrator. This therefore provides a very streamlined approach for moving to liquidation, as it expressly avoids the need to hold a further meeting of either members or creditors for the purpose.

4.11.4  Moving from administration to dissolution Alternatively, if the administrator thinks that the company has no property which would permit a distribution to its creditors, they may instigate its dissolution (para 84 Sch B1 IA 1986). To do so, the administrator sends a notice to the Registrar of Companies (with copies to the court and to each creditor of whose name and address they are aware). On the date this notice is registered, the administrator’s appointment ends. The company is deemed to be dissolved three months afterwards. This method, coupled with the administrator’s ability to make distributions to creditors, will enable the administrator to bring the company’s affairs to an end without the need for a separate liquidation (Re GHE Realisations Ltd [2006] 1 WLR 287).

4.11.5  Termination by application to the court by the administrator Under para 79(1) and (2) Sch B1 IA 1986, the administrator may apply to the court to end the administration, and indeed they must do so if: •

they think that the purpose of the administration cannot be achieved;

•

they think that the company should not have entered into administration; or

•

a resolution is passed at a creditors’ meeting requiring them to do so.

The court may adjourn the hearing conditionally or unconditionally, dismiss the application, make an interim order or make any other order it thinks appropriate. In Re TM  Kingdom Ltd [2007]  BCC  480 this route allowed a company to move to a creditors’ voluntary liquidation where, for various reasons, other routes were unavailable.

4.11.6  Termination where the purpose of administration is achieved Where the administrator was originally appointed by court order, they must apply to the court if they think the purpose of administration has been sufficiently achieved (para 79(3) Sch B1 IA 1986). The court may make the same range of orders as in Section 4.11.5. In Re Hellas Telecommunications (Luxembourg) II SCA (in administration) [2011] EWHC 3176 (Ch), the court refused to allow the company to serve a notice 135

4.11  Administration on the Registrar of Companies to instigate its dissolution but instead ordered that the company go into compulsory liquidation. This case is discussed further in Section 3.8.3. Where an administrator appointed out of court thinks the purpose of administration has been sufficiently achieved, they may alternatively end the administration by filing a prescribed form of notice with the court and the Registrar of Companies (para 80 Sch B1 IA 1986). The administrator must also comply with certain requirements to give notice to creditors (r 3.56 IR 2016).

4.11.7  Termination on application by a creditor A creditor may apply to the court for the administration to end if it considers that the applicant for a court order or the out-of-court appointor had an improper motive (para  81 Sch B1  IA  1986). The court may make the same range of orders as in Section 4.11.5. The court has suggested that a director who transferred all of a company’s assets to another company which he owned before appointing an administrator of his own choice might be found to have an ‘improper motive’ (Coyne & Hardy v DRC Distribution Ltd & Foster [2008] BCC 612). Similarly where administrators had been appointed under a debenture that a de facto director had caused the company to enter into in his own favour the court found that he had had an improper motive in trying to improve his own prospects of influencing the insolvency process (Re CA&T Developments Ltd [2019] EWHC 3455 (Ch)). However, the court has held that a lender who appointed an administrator at the direction of a third party to whom it had transferred the economic interest in its loan, notwithstanding a challenge to its right to enter into such a transfer, did not have an improper motive (Thomas v Frogmore Road Real Estate Partners GP1 Ltd [2017] EWHC 25 (Ch). The judge also expressed the view that establishing an improper motive is not sufficient reason in itself to terminate the administration – the applicant must also produce satisfactory evidence that the statutory purpose of administration was unlikely to be achieved.

4.11.8  Termination following a public interest winding-up petition Under para 82 Sch B1 IA 1986, when a winding-up order is made following a petition presented on public interest grounds, or by the FCA or PRA under s 367 Financial Services and Markets Act 2000, or a provisional liquidator is appointed following such a petition, the court may order that the administrator’s appointment ceases to have effect. Alternatively, it may allow the administrator to remain concurrently in office with a liquidator, but modify the administrator’s powers.

4.11.9  The administrator’s discharge Under para 98 Sch B1 IA 1986, the administrator will be discharged from all liability in respect of any of their actions as administrator: 136

Administration 4.12 •

where the administrator was appointed out of court, at a time appointed by a resolution of the creditors’ committee or, if there is no such committee, by a decision of the creditors. However, if the administrator has stated that the company has insufficient property to allow any distribution to unsecured creditors other than the prescribed part, the administrator will instead be discharged at a time decided by the secured creditors and (to the extent that a distribution has been or may be made to preferential creditors) a decision of the preferential creditors; or

•

in any case, at a time specified by the court.

However, this does not protect the former administrator from a later claim under para  75 Sch B1  IA  1986, which can be brought at any time whilst the company remains in existence. Such an action is possible even if the company has been dissolved, as long as the time period for restoring the company has not yet expired.

4.12  PRE-PACKAGED ADMINISTRATIONS 4.12.1  What is a pre-packaged administration? The essential difference between a conventional (or ‘trading’) administration and a pre-packaged administration is that the latter is entirely pre-planned before the administrator is appointed. The purchaser is identified, and will agree the sale assets and the price in advance. The sale agreement is also drafted and negotiated. The administrator enters into the pre-agreed sale agreement almost immediately after their appointment. A  ‘pre-packaged’ sale of a company’s business or other assets by an insolvency officeholder can involve a formal insolvency process other than administration. Indeed, historically such a sale would more likely have involved a receivership or liquidation. However, various features of the administration process, including the ability of the directors to appoint an administrator out of court and the ability of the administrator to sell the company’s entire business without prior reference to the creditors mean that it is mechanistically well-suited to a pre-packaged sale. The term ‘pre-pack’ therefore has become largely synonymous with a pre-packaged administration. The uses of a pre-pack as a restructuring tool are discussed in Chapter  11. This section discusses some of the general considerations involved in a pre-pack.

4.12.2  How is the proposed administrator involved prior to appointment? The proposed administrator will be chosen at an early stage. They will play a key role in negotiating the sale terms prior to their appointment, since ultimately it is they who will direct the company to enter into the sale. On any sale of the business, the administrator will need to show that they have complied with their duty to obtain the best price reasonably obtainable (see Section 4.7.1). In a conventional administration, the administrator will seek to comply with this duty by advertising the business for sale on the open market, using whatever method is most appropriate. 137

4.12  Administration In a pre-pack, the administrator may be able to rely on marketing carried out prior to their appointment. In many pre-packs, however, the business will not be marketed in advance, as this could draw attention to the impending insolvency and could adversely affect the business. The proposed administrator will instead need to obtain professional valuations prior to the sale and rely on these. In this case, some proposed administrators prefer to obtain two such valuations as a precaution. Typically, the administrator will also wish to ensure that the price payable is comfortably in excess of the higher of these valuations, to ensure that they cannot be successfully challenged for not having exposed the business to the market.

4.12.3  What are the advantages of a pre-packaged administration? The key advantage to the business going forwards, and therefore to the purchaser, is that the speed of the sale preserves goodwill by helping to retain those employees, suppliers and customers who are crucial to the business. A conventional administration will always involve a period of uncertainty before the fate of the business is known, and this might unnerve these parties. In a pre-pack the business will have been transferred to a solvent purchaser before the majority of them ever learn of the administration. The administration and the completed sale can therefore be announced both within the business and to the outside world in a single, upbeat statement. A  sale out of administration is attractive to the directors because it will be the administrator, not the directors, who is legally responsible for ensuring that a proper price is achieved on the sale. It is argued that creditors also benefit because a pre-packaged business sale enables the business to be sold as a going concern, which should realise more than the break-up and sale of assets. A  potential administrator may regard a conventional administration as unfeasible for a number of reasons, including the difficulty of funding an ongoing administration process, the effect of TUPE, the likelihood that key suppliers will seek duress payments, the possibility that no buyer will ultimately be found and the inherent risks of continued trading generally, leaving a pre-pack as the most attractive option for selling the business.

4.12.4  What are the criticisms of pre-packs? In 2013 the Government commissioned Teresa Graham to carry out an independent review of pre-packs. She, in turn, commissioned research on a large sample of prepacks carried out during the preceding few years. The resulting report, the Graham Review, was published in June 2014. Whilst noting various positives about prepacks, the Graham Review noted a number of areas which still needed improving: •

The nature of pre-pack administrations leads to a lack of transparency before the sale. Unsecured creditors feel disenfranchised by this secrecy, particularly where the purchaser is connected to the insolvent company.

•

The marketing of pre-pack companies for sale is insufficient. The research suggested that, where no marketing was carried out, pre-packs returned less money to creditors. Improved quality of marketing may not only assist the administrator in receiving a better return but also improve creditor perceptions that they were getting the best deal. 138

Administration 4.12 •

Although the research carried out showed that administrators obtained an independent valuation in more than 90% of cases, these were frequently desktop valuations and often valued tangible assets and property only and not intangibles such as intellectual property and goodwill. More should be done to explain the valuation methodology.

•

The administrator has no legal requirement to look at whether the business will be viable in the hands of the purchaser.

The Graham Review made a number of recommendations, with the suggestion that Government might wish to legislate if these were not voluntarily adopted by the insolvency profession.

4.12.5 What has been done in response? Although some protections had already existed prior to the Graham Report, in 2015 the insolvency profession duly put into place a number of further protections for creditors in relation to pre-packs which broadly followed its recommendations. These included the introduction of a ‘pre-pack pool’ an independent body of experienced business people. Where a connected party proposed to purchase the business and asset of a company via a pre-pack they were entitled to apply to the pool for an opinion on the transaction. Paragraph 60A Sch B1 IA 1986 was nevertheless also introduced to give the Secretary of State the power to legislate if so required. It originally only granted this power for a five-year period, but the period was subsequently extended. In 2020 the government published a report setting out its views on how well the voluntary measures put in place to comply with the recommendations in the Graham Review had worked. It noted some positive improvements, but also noted the low number of connected parties who had voluntarily made use of the pre-pack pool. The report made clear that in many circumstances a pre-pack sale remained the best outcome for creditors and that the government did not therefore intended to impose an outright ban on such sales. However, it concluded that some form of regulation was necessary.

4.12.6  What legislation is now in place? 4.12.6.1  The relevant regulations The Administration (Restrictions on Disposal etc to Connected Persons) Regulations 2021, referred to here as the ‘Regulations’, now apply to ‘substantial disposals’ to ‘connected persons’ in administrations that commence on or after 30 April 2021. A substantial disposal means: •

a disposal, hiring out or sale of what is, in the administrator’s opinion, all or a substantial part of the company’s business and assets;

•

to one or more connected persons; and

•

within eight weeks beginning on the day on which the company enters into administration. 139

4.12  Administration

4.12.6.2  Who is a connected person? For the purposes of the Regulations, a person is connected with the company if that person is: •

a relevant person in relation to it; or

•

a company connected with it

(para 60A(3) Sch B1 IA 1986). A relevant person is: •

a director or other officer of the company;

•

a shadow director of the company; or

•

an associate of a director, other officer or shadow director or an associate of the company, other than someone who is an associate only by reason of an employee relationship.

(para 60A(4)(a) Sch B1 IA 1986). One company is connected with another if someone who is a relevant person in relation to the first company is also, or has at any time been, a relevant person in relation to the second (para 60A(4)(b) Sch B1 IA 1986). The meaning of ‘associate’ is discussed further in Chapter 5, Section 5.8.

4.12.6.3  What restrictions apply to substantial disposals? The administrator must not make a ‘substantial disposal’ unless: •

the administrator seeks a decision on the proposed disposal from the company’s creditors under para 51(1) or 52(2) Sch B1 IA 1986 and the creditors approve the administrator’s proposal; or

•

the connected person has first obtained a report from an evaluator in respect of the proposed disposal.

In the first case, it appears that even where a decision of the creditors approving the administrator’s proposals would not ordinarily be required, for example, because the company has insufficient property to allow any distribution to unsecured creditors other than the prescribed part, the administrator would still need to seek a decision of the creditors in order to approve a substantial disposal. In the second case, a report from an evaluator must include a statement that either: •

the evaluator is satisfied that the consideration to be provided for the relevant property and the grounds for the substantial disposal are reasonable in the circumstances (a ‘case made opinion’); or

•

the evaluator is not satisfied that the consideration to be provided for the relevant property and the grounds for the substantial disposal are reasonable in the circumstances (a ‘case not made opinion’).

If the connected person is disappointed by the first report they receive, there is nothing to prevent them obtaining a further, hopefully more favourable report from a different evaluator. Nevertheless, if an evaluator becomes aware that a previous report has been obtained, they must either provide details in their report, or state that 140

Administration 4.12 the report (or at least details of it) have not been made available to them and explain what attempts they made to obtain it. The administrator must send a copy of the report to every creditor, other than a creditor who has opted-out of receiving correspondence, and to Companies House at the same time as sending them a copy of the administrator’s proposals under para 49 Sch B1 IA 1986. However, this does not prevent the disposal being carried out prior to the administrator sending out the proposals and report. The administrator is entitled still to proceed if the report contains a case not made opinion, but will need also to provide a statement to the creditors setting out their reasons for proceeding with the disposal regardless.

4.12.6.4  Who can act as an evaluator? Both the administrator and the evaluator must be satisfied that the evaluator has sufficient relevant knowledge and experience to make the report. The evaluator must have professional indemnity insurance in place to cover their possible liabilities to the administrator, the connected person, the creditors or any other person, although it is hard in practice to see that any liability is likely to arise. The evaluator must also be independent, but this requirement will be satisfied unless the evaluator: •

is connected with the company;

•

is an associate of the connected person or connected with the connected person;

•

knows or has reason to believe that they have a conflict of interest with respect to the substantial disposal; or

•

has within the 12 months before the date of the report provided advice to, and in respect of, the company (or a connected person in relation to the company) in connection with or in anticipation of the commencement of an insolvency procedure or in relation to corporate rescue or restructuring.

Initially, one of the main concerns about the Regulations was how few qualifications were required to act as an evaluator. In practice, these concerns seem now to have reduced, not least as many connected persons are turning to former members of the pre-pack pool when choosing an evaluator.

4.12.7  What other protections are there for creditors? 4.12.7.1  Relevant statements of insolvency practice In addition to the Regulations, creditors also benefit from the provisions of two Statements of Insolvency Practice, SIP 13 and SIP 16. The circumstances in which each will apply differs, although in many cases their application will still overlap. •

The Regulations apply to substantial disposals to connected persons within eight weeks of the start of an administration. Negotiations with the buyer may or may not have taken place prior to the administrator’s appointment.

•

SIP 13 is designed to give professional guidance to insolvency practitioners in relation to any disposal of assets to a connected person in any insolvency process. 141

4.12  Administration •

SIP 16 is designed to give professional guidance to insolvency practitioners in relation to pre-packaged sales by an administrator. It applies irrespective of whether or not the buyer is connected. However, it applies only where the sale takes place immediately or shortly after the appointment, and contemplates that the sale will have been negotiated with the buyer prior to the appointment.

4.12.7.2 SIP 13 As noted already, SIP  13 applies wherever there is to be a disposal of assets to connected parties in an insolvency process. When advising a debtor company prior to an appointment, an insolvency practitioner should recognise that a different insolvency practitioner may be the eventual office holder. They also need to make it clear that their role is not to advise any parties concerned with the purchaser who should be encouraged to take independent advice – this is particularly important where there is a possibility that a connected party may acquire an interest in the business or assets. Once appointed, the office holder should provide creditors and other interested parties with sufficient information such that a reasonable and informed third party would conclude that the transaction was appropriate and that the office holder has acted with due regard for the creditors’ interests. The next report to creditors after the transaction has taken place should include a proportionate and sufficiently detailed justification of why a sale to a connected party was undertaken and the alternatives considered.

4.12.7.3 SIP 16 The present version of SIP  16 applies to pre-packs where the administrator was appointed on or after 30 April 2021. It takes into account recommendations made in the Graham Report, although it does not entirely follow the suggested form annexed to that report. When preparing for a pre-pack, the proposed administrator must, amongst other things: •

Keep a detailed record of the reasons why a pre-packaged sale has been chosen as the best course of action for creditors.

•

Make it clear to the directors of the company that the proposed administrator has been appointed to advise the company, and not the directors on their personal positions, where that is the case.

•

Encourage the directors of the company to take independent advice, in particular if any director proposes to acquire assets in the sale.

•

Advise the company that any valuation obtained should be carried out by appropriate independent valuers who carry adequate professional indemnity insurance. If the administrator relies upon a valuation or advice other than from such a source, this should be disclosed and explained.

The proposed administrator should also advise the company that any marketing should follow certain specified marketing essentials which replicate the six principles of good marketing outlined in the Graham Report. These are, in summary: 142

Administration 4.12 •

Market the business as widely as possible, proportionate to its nature and size.

•

Do not simply list the marketing undertaken, but justify this to the creditors.

•

Do not simply rely on any prior marketing by the company, unless satisfied as to its adequacy and independence.

•

Market for an appropriate period of time.

•

Market online as well by any other media.

•

Particularly with sales to connected parties, explain how the marketing strategy as a whole has achieved the best available outcome for creditors in the circumstances.

Where there has been a deviation from any of these marketing essentials, the administrator needs to explain how a different strategy has delivered the best available outcome. SIP 16 then places an emphasis on further disclosure by the administrator once they have been appointed. The administrator should provide the creditors with a detailed explanation, termed the ‘SIP  16 Statement’, of why a pre-packaged sale was undertaken and all alternatives considered as per the first notification to creditors, and in any event within seven calendar days of the transaction. Unless there are exceptional circumstances, the administrator must disclose certain specified information to creditors within the SIP 16 Statement, including: •

the source and date of the initial introduction to the administrator and the extent of their and their firm’s involvement prior to the appointment;

•

whether efforts were made to consult with major or representative creditors, and the upshot of such consultations, or an explanation of why no consultations took place;

•

why it was not appropriate to trade the business and sell it as a going concern during the administration;

•

details of requests made to potential funders to fund working capital requirements, or an explanation of why no such requests were made;

•

the identity of the buyer of the business or assets;

•

any valuations of the business or underlying assets obtained;

•

any alternative courses of action considered by the administrator;

•

the consideration for the sale and the terms of payment; and

•

any connection between the buyer and the directors, former directors, members or secured creditors of the company.

If information is withheld due to exceptional circumstances, the administrator must disclose the nature of these circumstances. SIP 16 notes that, if the sale is to a connected party, it is unlikely that considerations of commercial confidentiality would outweigh the need for creditors to be provided with this information. Finally, where the sale has been undertaken to a connected party, the SIP  16 Statement should also: 143

4.12  Administration •

where that sale is also a substantial disposal for the purpose of the Regulations, include a copy of the evaluator’s report unless this is already being sent to creditors at the same time as the SIP 16 Statement; and

•

state whether the connected party has provided a viability statement, and attach the statement if provided (see Section 4.12.7.4).

4.12.7.4  Viability statements A connected party wishing to make a purchase via a pre-pack may also prepare a viability statement outlining their view that the new company formed as the purchasing entity will survive for at least 12 months from the date of the purchase. The statement will be a matter of public record and is designed to include an explanation of what the purchasing entity would do differently to avoid a second business failure. Again, a viability statement is entirely voluntary, and a purchaser giving such a statement is likely to be motivated primarily by reputational considerations.

4.12.8  What is the attitude of the courts? As noted in Section 4.8.1, the courts had recognised for some time that even in a conventional administration assets may need to be sold urgently with the result that the approval of creditors cannot always be sought, but had still not contemplated specific sales at the time they granted an administration order. DKLL Solicitors v Her Majesty’s Revenue & Customs [2007] BCC 908, the facts of which are summarised in the box below, is the first reported case where the court was prepared to grant an administration order where it was aware that the intention was to carry out a prepackaged sale immediately after the administrators’ appointment. In Kayley Vending Limited [2009] EWHC 904 (Ch), the court reviewed some of the main criticisms of pre-packs and gave guidance as to the approach it would take when faced with such an application. The court would be alert to see, so far as it could, that the procedure was at least not obviously being abused to the disadvantage of creditors. As such, it would normally expect the evidence supporting the application to include in most cases the information identified in SIP 16 (see Section 4.12.6.3), insofar as this was known or ascertainable at the date of the application. Where some of this information was still commercially sensitive, appropriate arrangements could be made with the court to protect its confidentiality. In Hellas Telecommunications (Luxembourg) II SCA  [2009]  EWHC  3199 (Ch), the court made it clear that in general the question of whether to enter into a sale remained one for the administrator, and that in the majority of cases the making of an administration order, even in the context of a pre-pack, should not be taken as the court’s blessing of the pre-pack sale. Nonetheless, in the Hellas case itself, the court determined that the sale proposed was ‘the only real way forward’ and was prepared not only to make the administration order sought but also expressly to give the administrators liberty to enter into the pre-pack. A similar approach was taken more recently in Re Christophorus 3 Ltd [2014] EWHC 1162 (Ch) (see Section 11.7.2.1). Nevertheless, in Re Moss Groundworks Ltd [2019]  EWHC  2825 (Ch) the court declined to make an administration order. The marketing of the proposed sale was very truncated. So far as compliance with SIP  16 was concerned, the proposed administrators had simply said: ‘We confirm that the marketing undertaking has 144

Administration 4.12 conformed to the marketing essentials as set out in the appendix to SIP 16’, which was wholly inadequate. There was no adequate explanation of why it was proposed to sell assets with a book value in excess of £1 million to another company connected to the directors for £25,000 in cash and a promise to pay a further £105,000 in a month’s time. Instead, the court allowed the application to be adjourned to give the company and the proposed administrators an opportunity to reconsider the evidence, the process of marketing which had taken place and their compliance with SIP 16. Given that the majority of administrators are appointed out of court, however, there will be relatively few occasions where creditors will have the opportunity to question the proposed sale in advance at a court hearing. Normally, creditors would need to challenge the sale after it had already occurred. DKLL Solicitors v Her Majesty’s Revenue & Customs [2007] BCC 908 The partners of DKLL applied to the court for an administration order. It was proposed that, once appointed, the administrators would immediately sell the partnership’s business to a newly incorporated partnership for a total consideration of £400,000. The proposed administrators had concluded that based on the information available to them, the proposed sale represented a better outcome for creditors and stakeholders than would be achieved on a liquidation. There was some evidence that a forced sale on a liquidation would realise only £105,000. In addition, a liquidation would create an extra £44,000 of preferential claims by employees. HMRC argued that, as the majority creditor of the partnership by value, it would be in a position to defeat the administrator’s proposals at a creditors’ meeting. It would therefore effectively be disenfranchised if the sale were to proceed without a creditors’ meeting taking place. The court noted, however, that even a majority creditor does not have an absolute veto on the implementation of an administrator’s proposals. Even if the prepack route were not followed here, allowing HMRC to defeat the administrators’ proposals at a creditors’ meeting, there was a real prospect that a court would subsequently be prepared to authorise the proposed sale. In the light of this, the court considered fully whether the proposed administration order was reasonably likely to achieve the purpose of the administration. It took into account HMRC’s opposition, but also the interests of the ‘other stakeholders’. It was particularly influenced by the fact that the proposed sale appeared to be the only way of saving the jobs of the 50-odd employees of the partnership. It also noted that the proposed sale was also likely to result in the affairs of the partnership’s clients being dealt with, with the minimum of disruption. It therefore made the administration order sought.

4.12.9  Pre-pack costs When implementing a pre-packaged administration, significant costs will almost inevitably be incurred before the date when the administrator is formally appointed. As already noted in Section 4.6.4, rules 3.35(10) and 3.36  IR  2016 make specific provision for an administrator to put together a statement of fees charged and 145

4.12  Administration expenses incurred prior to the company entering into administration but with a view to it doing so. Rule 3.52 IR 2016 then sets out the procedures for approval of these costs, which are similar to those already described for the administrator’s post-appointment remuneration in Section 4.10.3. However, the Insolvency Service have made it clear that, in the interests of transparency, where one of the purposes of a creditors’ decision is to approve pre-administration costs, this needs to be identified as a separate issue in the notice sent to the creditors. If these procedures in turn still fail to produce an approval at all, or at a level the administrator considers sufficient, they may apply to the court for an appropriate determination. The courts have made it clear that it is a matter for their discretion as to whether to allow pre-administration costs. In exercising this discretion, the courts have looked at whether the effect of the pre-pack was to allow management to retain the business and if so, whether the advantage to them in doing so outweighed the advantage of the pre-pack to the creditors. In Kayley Vending the court was satisfied that there was a benefit to creditors and no question of a purchase by management, and thus approved the payment of the pre-administration costs. In Re Johnson Machine and Tool Co Limited [2010] EWHC 582 (Ch), however, which did involve a purchase by a company connected with the existing directors, the court declined to give its approval as these costs should more appropriately be borne by those directors.

146

Chapter 5

Antecedent transactions 5.1 INTRODUCTION 5.1.1 Overview As was explained in detail in Chapter 2, if a company goes into liquidation, its assets (if any) after secured and preferential creditors have been paid will be distributed among its unsecured creditors pari passu ie in proportion to the amount of the admitted debt owed to each creditor. This is the liquidation ‘dividend’. The purpose of liquidation is to achieve equality among unsecured creditors. Similarly, if a company goes into a ‘distribution’ administration, its assets may be distributed in a similar manner. The IA  1986 contains a number of provisions designed to prevent steps being taken ahead of liquidation or administration to defeat the pari passu principle. In particular, liquidators and administrators (and in some cases creditors) have powers to seek redress in circumstances where assets have been removed from the company at less than their proper value, or individual creditors have been given preferential treatment. These are discussed in this chapter. As discussed further in Chapter  6, directors found to have been involved in approving transactions of this kind may incur personal liability or disqualification. In addition to the specific types of antecedent transaction described in this chapter, the courts have also been prepared to set aside arrangements which they regard as attempts to contract out of applicable insolvency law, on the basis that they are therefore void as a matter of public policy. This has already been discussed in Chapter 2.

5.1.2  Actions available Table 5.1 illustrates the possible actions available. Table 5.1 – Possible actions available Section of IA 1986 Transactions avoided

Available to

Section 238

Transactions at an undervalue

Liquidator or administrator

Section 239

Preferences

Liquidator or administrator

Section 244

Extortionate credit transactions

Liquidator or administrator

Section 245

Floating charges for no new value

Liquidator or administrator

Section 423

Transactions defrauding creditors

Liquidator, administrator or any victim of the transaction

Section 127

Distributions post-presentation of windingup petition

Liquidator

None (common law remedy)

Arrangements in contravention of pari passu principle (discussed in Chapter 2)

Liquidator

147

5.1  Antecedent transactions As will be discussed further below, many of these actions will depend on the transaction or other event in question having occurred during a particular time period. These time periods are sometimes described as the ‘hardening periods’ for a transaction, since once they have elapsed without the ‘onset of insolvency’ having occurred, the transaction can no longer be attacked under the relevant section of the legislation. For certain actions, the time period in question will also differ depending on whether a beneficiary of the transaction was connected to the company. These time periods are summarised in Table 5.2. Table 5.2 – ‘Hardening periods’

5.1.3  What is the ‘onset of insolvency’? The onset of insolvency is the end point from which the various time periods indicated above are calculated. It does not depend on when the company first becomes unable to pay its debts, but on when a specific step is taken to instigate the company’s formal insolvency. It is defined in s 240(3) IA 1986 as follows: •

where a company goes into administration as a result of a court order, the date on which the administration application was made;

•

where a company goes into administration as a result of an out of court appointment, the date on which the copy of the notice of intention to appoint was filed at court (or if no notice of intention is filed, the date on which the administrator’s appointment takes effect);

•

where a company goes into compulsory liquidation (except where that liquidation follows an earlier administration process), the date of presentation of the winding-up petition;

•

where a company goes into voluntary liquidation (except where that liquidation follows an earlier administration process), the date on which the resolution was passed for the winding-up of the company;

•

where a company goes into any type of liquidation following an earlier administration process, the date on which the onset of insolvency occurred in relation to that earlier administration process, as described above. 148

Antecedent transactions 5.2

5.2  TRANSACTIONS AT AN UNDERVALUE 5.2.1  What is a transaction at an undervalue? The liquidator or administrator of a company which has at a ‘relevant time’ entered into a transaction with any person at an undervalue may apply to the court under s 238 IA 1986 for an order restoring the position to what it would have been if the company had not entered into the transaction. ‘Transaction’ is not exhaustively defined in the IA  1986. It expressly includes a gift, agreement or arrangement, but is sufficiently wide to cover any dealing with the company whether formal or informal. A transaction is at an undervalue if: •

the company makes a gift or otherwise enters into a transaction on terms that provide for the company to receive no consideration (ie  payment or other benefit); or • the company enters into a transaction for a consideration the value of which, in money or money’s worth, is significantly less, in money or money’s worth, than the consideration provided by the company. This is considered further in Section 5.2.2. A transaction at an undervalue is entered into at a relevant time if: • the company is unable to pay its debts at that time, or becomes unable to pay its debts as a result of the transaction, and • if the onset of insolvency occurs within two years of the company entering into the transaction, or if the transaction is entered into between the date on which an administration application is made or a notice of intention is filed and the date on which the administrator is appointed. If the transaction is entered into with a person connected with the company, however, the onus is on the connected person to show that the company was able to pay its debts at the time of the transaction and remained so immediately afterwards. Section 5.8 considers when a person is connected. Transactions at an undervalue – summary A  transaction cannot be set aside as a transaction at an undervalue under s 238 IA 1986 if: •

the company received consideration which was not significantly less in money’s worth than the true value of any asset transferred by (or released by) it; or

•

the company was able to pay its debts at the date of the transaction and remained so immediately afterwards; or

•

no administration or liquidation process is successfully instigated for at least two years after the date of the transaction; or

•

the court can be convinced that the transaction was entered into in good faith and for the purpose of carrying on the company’s business and that at the time there were reasonable grounds for believing that the transaction would benefit the company. 149

5.2  Antecedent transactions

5.2.2  How is ‘value’ determined? As a starting point, the value of an asset should be regarded as not less than the amount which a well-informed purchaser is prepared in arm’s-length negotiations to pay for it (as per Phillips v Brewin Dolphin Bell Lawrie Limited [2001] 1 WLR 143). In light of this, the safest way of determining value would be properly to expose the asset to the market (if a market exists). The alternative is to obtain an expert valuation, although as case law has shown this may not be sufficient in itself if mistakes have been made in the valuation. Indeed, any two valuers may disagree significantly as to the value of the asset. In some cases, particularly where there is not a ready market for the asset in question, the court may accept that there are a range of possible figures within which the value might lie (Ramlort v Reid [2005] 1 BCLC 331). Nonetheless, a buyer may consider it prudent to insist that the company obtains two valuations to guard against a single valuation falling outside the accepted range. The value in question is the value to the company, not to the counterparty. Thus the consideration provided by a company will include any loss of value it suffers to its remaining assets. This is illustrated by Agricultural Mortgage Corporation plc v Woodward [1994] BCC 688 (a case which principally concerned s 423 IA 1986), where the counterparty was granted a protected tenancy. Although a market rent was payable, the counterparty’s security of tenure also significantly reduced the value of the land. In contrast, if the asset has a special value to the counterparty which does not affect the company or its remaining assets, this need not be taken into account. It may be necessary to look at the combined effects of a series of linked transactions to determine value. Among other things, consideration provided by a third party may be taken into account in determining value (Phillips v Brewin Dolphin Bell Lawrie Limited, the facts of which are described in the box below). The court may apply hindsight to determine value (Phillips v Brewin Dolphin Bell Lawrie Limited and also Re Thoars (Deceased) [2003] 1 BCLC 499). Phillips v Brewin Dolphin Bell Lawrie Limited [2001] 1 WLR 143 A J Bekhor & Co (‘AJB’) negotiated to sell its business to Brewin Dolphin & Co Limited (‘B Ltd’) for £1.25m. To achieve this, AJB transferred the business to its wholly-owned subsidiary, Bekhor Securities Limited (‘BSL’) for £1. It then sold its shares in BSL to B Ltd. In return: •

B  Ltd assumed AJB’s liability to its employees for certain redundancy payments, later assessed at £325,000.

•

Under a separate agreement, B Ltd’s parent, Private Capital Group (‘PCG’) agreed to pay £312,500 per annum (in arrears) to AJB over four years under a sub-lease of certain computer equipment which AJB had itself leased from third parties.

•

PCG made a loan of £312,500 to AJB which was intended to be set off against the first payment of sub-rent.

AJB defaulted on their rental payment under the head leases of the computer equipment, and the third parties duly repossessed the equipment. PCG thus treated the sub-lease as terminated and made no payments to AJB. 150

Antecedent transactions 5.2 AJB was subsequently wound up and its liquidator brought proceedings contending that the arrangement under which the BSL shares were sold was a transaction at an undervalue. The court concluded that: •

The linked agreements together constituted a single overall transaction. It was irrelevant who provided the various elements of the total consideration. PCG’s agreement to pay sub-rent formed part of the consideration received by AJB and had to be valued.

•

The court was entitled to give precedence to reality over speculation, and could therefore use the benefit of hindsight to value the consideration actually given by PCG. The subsequent default by AJB and consequent termination of the sub-lease by PCG meant that the element of the consideration provided by PCG had no value.

There was therefore an undervalue of £725,000, being the difference between the value of the shares (£1,050,000) and the assumed obligation to pay the employees, which B Ltd must pay. However, credit would be given for PCG’s loan provided PCG withdrew its proof for that sum in AJB’s liquidation.

5.2.3  What defences exist to such an action? Under s 238(5) IA 1986 there is one statutory defence to such an action. The court cannot make an order under s 238 in respect of a transaction at an undervalue if it is satisfied that: •

the transaction was entered into in good faith and for the purpose of carrying on the company’s business; and

•

at the time there were reasonable grounds for believing that the transaction would benefit the company.

Whilst potentially useful in some cases, this is generally regarded as a relatively narrow defence with limited application. The good faith involved is that of the company, not the other party. Nonetheless the onus is still on the person resisting the order, most likely to be that other party, to establish the defence (Re Barton Manufacturing Co Limited [1999] 1 BCLC 740). The courts have also made it clear that, whilst the first limb of the defence contains subjective elements, the second limb of the test is a purely objective one (Lord v Sinai Securities Ltd [2004] BCC 986).

5.2.4  Examples of a transaction at an undervalue The following types of transaction are among those at risk of being set aside as transactions at an undervalue: •

a sale of assets, or provision of services by the company for a price which is significantly less than the actual value of those goods or services;

•

a payment by the company for assets sold or services provided to the company which is significantly greater than the actual value of those goods or services;

•

the making of a loan, or the sale of an asset, by the company where the other party’s ability to pay is in significant doubt; 151

5.2  Antecedent transactions •

the release of one of the company’s debtors where the benefit received in return by the company (if any) is significantly less than the value of the debt; or

•

the payment of a dividend by the company, notwithstanding that it may have had sufficient distributable reserves to permit this under the relevant provisions of CA 2006 (see BTI 2014 LLC v Sequana SA [2019] EWCA Civ 11, a case later appealed to the Supreme Court but not on this point).

5.2.5  The position of a secured creditor In MC Bacon Limited [1990] BCC 78, the court held that the granting of a charge was not capable of being an undervalue. The security in question could not be said to have been granted for no consideration, as the bank had in return agreed not to call in its overdraft. So far as a comparison of the value obtained by and the value given by the company was concerned, the court held that there had been no depletion of the company’s assets or diminution of their value. Whilst the company may have lost the ability to apply the proceeds of sale of the assets charged otherwise than in satisfaction of the secured debt, this was not capable of valuation in monetary terms. In Hill v Spread Trustee Co Ltd [2006] BCC 646 (a case which principally concerned s 423 IA 1986), the court observed that, whilst there may be no change to the assets of the company when security was taken, there seemed no reason why the value of the right to take priority to unsecured creditors which the company gives the other party by granting the security should be left out of account. Whilst it was not ultimately necessary to decide this point in Hill, these remarks were viewed for some time as casting doubt on the decision in MC Bacon. However, in Burnden Holdings (UK) Limited (in liquidation) v Fielding [2019] EWHC 1566 (Ch) at 505, the court considered Hill and made it clear that it preferred the reasoning in MC Bacon. There is no reported case on whether the granting of a guarantee is capable of being an undervalue. It is certainly theoretically possible since, whilst it will not necessarily be a straightforward exercise, the value of both the consideration received by the guarantor and that provided by the guarantor can be measured in monetary terms. This is usefully illustrated in sections 13–32 to 13–34 of Goode on Principles of Corporate Insolvency Law (5th Edn, Sweet & Maxwell, 2018). However, the author concludes that in practice, due to problems of valuation, it is unlikely that a guarantee will be impeached as a transaction at an undervalue except where it is clearly of no benefit to the guarantor.

5.2.6  What orders can the court make as a result? Where it finds that there has been a transaction at an undervalue, the court may make such order as it thinks fit to restore the position. Section 241 IA 1986 lists a number of possible orders, but makes it clear that this is not an exhaustive list. Among other things, such an order may: •

require property transferred as part of the transaction, or the proceeds of its sale, to be returned to the company;

•

where property has been vested in any person, apply either the proceeds of sale of the property transferred or of the money so transferred;

•

release or discharge (in whole or in part) any security given by the company; 152

Antecedent transactions 5.2 •

require any person to pay such benefits to the insolvency officeholder as the court may direct;

•

provide for any surety or guarantor whose obligations to any person were released or discharged (in whole or in part) under the transaction to be under such new or revived obligations as the court thinks appropriate;

•

provide for security to be given for the discharge of any obligation imposed by or arising under the order, for such an obligation to be charged on any property, and for the security or charge to have the same priority as a security or charge released or discharged (in whole or in part) under the transaction; and

•

provide for the extent to which any person whose property is ordered to be returned (or transferred) to the company, or on whom obligations are imposed by the order, is to be able to prove in the liquidation for debts or other liabilities which arose from, or were released or discharged (in whole or in part) under the transaction.

The position to be restored is that of the company, not that of the other party. A  person purchasing an asset from an insolvent company at a potential undervalue cannot simply assume that a court will allow them to retain their purchase by means of paying a further sum to make good any element of undervalue (Walker v W A Personnel Ltd [2002] BPIR 621, approved in Ramlort Ltd v Reid [2005] 1 BCLC 331). As can also be seen, such an order may even apply to a person who was not a direct party to the original transaction with the company. However, a third party in this position does have a defence if the benefit acquired by them was acquired in good faith and for value. This begs the question of when the third party is acting in good faith. Where that third party, at the time it acquired or received the property in question: •

had notice of the relevant surrounding circumstances and of the fact that the first steps had already been taken to bring administration or liquidation proceedings against the company; or

•

is connected with, or is an associate of, the company or the person who entered into the original transaction,

they are presumed not to have received the benefit in good faith, unless they can prove otherwise. The courts have observed however that the practical reality is that the onus is always on the third party to prove good faith (Re Sonatacus Ltd [2007] BCC 186). The purpose of this section is nevertheless to restore the position rather than to compensate the company. It does not enable the court to make an order against a director who caused the company to enter into the transaction but did not benefit personally as that director has nothing to ‘restore’ (Johnson v Arden [2018] EWHC 1624 (Ch) at 101). If there has been any wrongdoing by that director, a liquidator can instead claim against the director under s 212 IA 1986 (see Section 6.4.4).

5.2.7  Who benefits from the proceeds of the action? Actions under s  238  IA  1986 are vested in a liquidator, not the company, and accordingly any recoveries are held by the liquidator on trust for the general body of creditors among whom they have to distribute the company’s assets. One key consequence of this is that any proceeds from the action will fall outside the scope 153

5.3  Antecedent transactions of any floating charge over the company’s assets (s 176ZB IA 1986). Therefore, such an action is likely to benefit a floating chargeholder only insofar as it could prove for the unsecured balance of its claim. An administrator or liquidator is separately allowed to assign their right of action under s 238 IA 1986 (including the proceeds of that action) (s 246ZD IA 1986). This provides them with another potential way of gaining a recovery for creditors from an action which they would not themselves have the resources to pursue.

5.3 PREFERENCES 5.3.1  What is a preference? Under s 239 IA 1986, the administrator or liquidator of a company which has at a ‘relevant time’ given a preference to any person may apply to the court for an order restoring the position to what it would have been if the preference had not been given. A company gives a preference to a person if: •

that person is either one of the company’s creditors or a surety/guarantor for any of the company’s debts or other liabilities; and

•

the company does anything or suffers anything to be done which has the effect of putting that person into a position which, in the event of the company going into insolvent liquidation, will be better than the position that person would have been in if that thing had not been done; and

•

the company, in deciding to give the preference, was ‘influenced by a desire’ to improve the third party’s position (see Section 5.3.3 below).

A preference is given at a relevant time if: •

the company is unable to pay its debts at that time, or becomes unable to pay its debts as a result of the preference; and

•

if the onset of insolvency occurs within six months (or, if the company and the recipient of the preference are connected, within two years) of the company giving the preference, or if the preference is given between the date on which an administration application is made or a notice of intention is filed and the date on which the administrator is appointed. Preferences – Summary A transaction cannot be set aside as a preference if: • the company remained able to pay its debts at the date of, and immediately after, the transaction; or • the beneficiary of the alleged preference is someone other than a creditor, surety or guarantor; or • the beneficiary of the alleged preference is not in fact placed in a better position than that in which they would otherwise have been on an insolvent liquidation, eg because they hold security; or • no administration or liquidation process is successfully instigated for at least six months after the date of the transaction (unless the beneficiary is connected to the company, in which case this time period is two years); or 154

Antecedent transactions 5.3 •

the liquidator/administrator cannot establish that the company was ‘influenced by a desire’ to produce the result in question (although note the presumption which applies when the beneficiary is connected to the company).

5.3.2  When is a creditor or guarantor put in a better position? One question here is when the ‘insolvent liquidation’ should be regarded as having occurred. Indeed, it is open to an administrator to bring a preference action, even though the company concerned may never enter into liquidation at all. The legislation does not assist here. However, commentators have suggested that it is most appropriate to consider the creditor’s or guarantor’s position in a hypothetical insolvent liquidation occurring immediately after the preference was given. Given the underlying purpose of s  239  IA  1986, logically the action in question must also deplete the assets available to the remaining body of creditors in some way before it will be a ‘preference’. Therefore, for example, if the company arranges for a third party to repay one of the company’s creditors in full on terms which do not create any new liability on the part of the company, this payment should not be regarded as a preference. A further potentially relevant question is what is meant by the word ‘suffers’. In Parkside International Limited (in administration) [2008] EWHC 3554 (Ch), the court explained that for a company to suffer something to be done, the company must permit something to happen that it has the power to stop or to obstruct. Accepting, or simply remaining passive in reaction to, the occurrence of an event over which the company has no control does not amount to suffering that event to be done.

5.3.3  When is a company ‘influenced by a desire’? The meaning of ‘influenced by a desire’ was considered in Re MC Bacon Limited [1990] BCC 78. It was held that: •

whilst the desire to improve the other party’s position must have influenced the minds of those making the decision, it need not have been the only factor (or even the decisive one); but

•

desire is subjective and does not simply mean intention – a person may choose the lesser of two evils without desiring either, so there must be some basis on which to conclude that the decision makers had the requisite desire over and above the mere fact that the company’s actions have placed the other party in a better position.

A later court suggested that there must be ‘a positive wish’ to improve the creditor’s position (Re Fairway Magazines Ltd [1992] BCC 924). A consequence of this is that where the company makes a payment to a creditor, or takes some other action as a result of genuine commercial pressure, the requisite element of desire may be absent – a point specifically made in Fairway Magazines. Whilst the result of such a payment or other action might still be to improve the position of the recipient, the company may be influenced by a desire to enable its 155

5.3  Antecedent transactions business to survive, rather than by a desire to prefer the recipient. (Indeed, if the directors can properly take the view at the time that the company’s prospects of survival are likely to be improved overall as a result of the payment, they might well conclude that it is likely to be to the benefit of all creditors, although this is a point they do need properly to consider before reaching that conclusion.) This might be used to justify payments to key suppliers who were threatening otherwise to cease to supply. Examples of other situations where there was no desire to prefer include: •

the grant of security for an existing overdraft as a condition of the bank’s continued support (Re MC Bacon Limited, above);

•

payment of arrears of fees to professional advisers whilst other creditors remained unpaid in order to secure those advisers’ continued services (Re Ledingham-Smith [1993] BCLC 635).

The onus is normally on the liquidator/administrator to prove the various components of preference, and the need to demonstrate that the company was influenced by a desire in particular may make preference claims hard to bring. However, where the recipient is connected to the company (unless they are connected only by virtue of being an employee), there is a presumption that they were influenced by such a desire unless they can demonstrate to the contrary. Section 5.8 considers when a person is connected.

5.3.4  Examples of preferences The following actions are among those most at risk of being set aside as preferences: •

grant of security to secure an existing debt (eg Re Mistral Finance Limited (in liquidation) [2001] BCC 27);

•

the repayment of a loan which is guaranteed by the directors; and

•

payment to a company connected to the debtor.

5.3.5  The position of a secured creditor As noted above, the grant of security is at risk of being set aside as a preference where the company was influenced by a desire to prefer that creditor. However, provided the original grant of the security itself cannot be set aside as a preference, or avoided on some other grounds, payments to a creditor who already holds security to reduce or discharge their debt are generally not regarded as a preference. The basis for this is that they do not place that creditor in any better position than that in which they would have otherwise been on an insolvent liquidation. Nonetheless, it is wise to consider such payments with some caution, since a payment will still improve the secured creditor’s position if, for example: •

it exceeds the likely realisable value of the assets over which the security is held; or

•

it erodes the moneys which would, on a liquidation or administration, need to be available to pay the prescribed part. 156

Antecedent transactions 5.4

5.3.6  What orders can the court make as a result? The court has the same wide powers as regards the types of order which can be made as for transactions at an undervalue, and the circumstances in which the rights of third parties can be affected are also the same.

5.3.7  Who benefits from the proceeds of the action? The comments in Section 5.2.7 apply equally to the proceeds from an action under s 239 IA 1986 and to the right to assign that action.

5.4  TRANSACTIONS DEFRAUDING CREDITORS 5.4.1  What is a ‘transaction defrauding creditors’? Under s 423 IA 1986, the liquidator or administrator of a company, or (either where the company is not in liquidation or administration or with the leave of the court) any victim of a transaction of the type described below, may apply to the court for an order restoring the position to what it would have been if the transaction had not been entered into, or otherwise for protecting the interests of anyone prejudiced by it. The applicant must establish that the company: •

entered into a transaction with another person at an undervalue; and

•

did so for the purpose of putting assets beyond the reach of a person who is making, or may at some time make, a claim against the company, or of otherwise prejudicing the interests of such a person in relation to the claim they are making or may make.

Despite the statutory title of this remedy, there is therefore no need for an applicant to establish actual fraud or dishonesty on the part of the directors. A transaction is at an undervalue if: •

the company makes a gift or otherwise enters into a transaction on terms that provide for the company to receive no consideration (ie no payment or other benefit); or

•

the company enters into a transaction for a consideration the value of which, in money or money’s worth, is significantly less, in money or money’s worth, than the consideration provided by the company.

Transactions defrauding creditors – summary A transaction cannot be set aside under s 423 IA 1986 if: •

the company received consideration which was not significantly less in money’s worth than the true value of any asset transferred by or right release by it; or

•

the purpose(s) of the transaction did not include that of putting assets beyond the reach of creditors or potential future creditors, or otherwise prejudicing their interests. 157

5.4  Antecedent transactions

5.4.2  How does this differ from s 238 IA 1986? The ‘transaction at an undervalue’ component of s  423 is the same as s  238, and accordingly comments in Section 5.2.2 on ‘value’ also apply equally to s 423. However, there are some important differences between the two sections. For the purposes of an action under s 423: •

the action need not be brought by a liquidator or administrator but can be brought by any victim – this also begs the question as to whether the proceeds of an action under s  423 might fall within the scope of a creditor’s floating charge;

•

there is no set period of time prior to the onset of insolvency during which the transaction must have occurred (indeed it is not even a necessary precursor to such an action that the company has subsequently entered into administration or liquidation). Thus a transaction can never completely ‘harden’ for the purposes of s 423, although in practice the courts may sometimes be reluctant to open up transactions going back many years;

•

it is unnecessary to prove that the company was unable to pay its debts when it entered into the transaction;

•

there is no defence equivalent to that contained in s 238(5) IA 1986; but

•

the company’s ‘purpose’ is material.

The slightly unusual use of s  423 in Dornoch Ltd v Westminster International BV [2009] EWHC 1782 (Admlty) illustrates various of these points. The claimant was an insurer, and no insolvency proceedings were involved. Perhaps most importantly, however, s 423 can therefore catch transactions entered into at a time when the company was solvent, but where the directors considered there was a risk of future insolvency and wished to protect assets from creditors in that event. In Sands v Clitheroe [2006] BPIR 1000 (a case involving an individual), the court held that that s 423 could apply to a sale of a property 15 years prior to that individual’s eventual bankruptcy.

5.4.3  What does ‘for the purpose of putting assets beyond the reach of creditors’ mean? If the court finds that the purpose of the transaction was to put assets beyond the reach of creditors, this is sufficient for the purposes of s 423. Note that: •

The fact that the company was not dishonest, and acted on legal advice does not preclude it from having the necessary purpose (Arbuthnot Leasing International Limited v Havelet Leasing Limited (No 2) [1990] BCC 636).

•

It need not be the only purpose of the transaction, nor does it need to have been the dominant or even a substantial purpose (JSC BTA Bank v Ablyazov [2018] EWCA Civ 1176).

•

The fact that the result of the transaction was to place assets outside the reach of creditors was not sufficient in itself, however, as purpose and result are different things (Royscot Spa Leasing Ltd v Lovett [1994] 11 WLUK 218). In the Ablyazov case, the court noted that a result is more likely to be perceived 158

Antecedent transactions 5.5 as positively intended, and therefore a purpose, if there is reason to think that it was something that the company desired.

5.4.4  What orders can the court make as a result? The court generally has the same wide powers as regards the types of order which can be made as for transactions at an undervalue, and the circumstances in which the rights of third parties can be affected are also the same. However, note that where an action is brought under s 423 the burden of proof is not reversed in the case of connected persons. In 4Eng Limited v Harper [2009] EWHC 2633 (Ch) the court also suggested that, if the beneficiary of the transaction had received the benefit in good faith and without knowledge of the transferor’s purpose, and had subsequently changed their position as a result of receiving that benefit, this might affect the order the court would make. In BTI 2014 LLC v Sequana SA [2019] EWCA Civ 11, however, the Court of Appeal declined to allow the shareholder which was the beneficiary to rely upon this defence where the change of position was part and parcel of its desire to remove an asset from the group. (The Sequana case was later appealed to the Supreme Court but not on this point.)

5.5  EXTORTIONATE CREDIT TRANSACTIONS 5.5.1  What is an extortionate credit transaction? Under s 244 IA 1986, a liquidator or administrator of a company which entered into a transaction which is or was extortionate within the three-year period ending on the day on which the company entered into administration or went into liquidation may apply to the court for an appropriate order. There is no requirement to show that the company became unable to pay its debts as a result of the transaction. It is also worth noting that, in the case of a compulsory liquidation, the three-year period is counted back from the date the company actually went into liquidation, and not the date the petition was presented. A  transaction is extortionate if, having regard to the risk accepted by the person providing the credit: •

its terms are or were such as to require grossly exorbitant payments to be made (whether unconditionally or in certain contingencies) in respect of the provision of the credit; or

•

it otherwise grossly contravened ordinary principles of fair dealing.

Historically, this provision derives from consumer credit legislation rather than insolvency legislation. The burden of proof is placed on the other party to the transactions to show that the transaction was not extortionate. However, the court has a full discretion as to whether to make any order. The courts recognise that high risk can justify high interest rates, so it seems that the terms will need to be unusually unfavourable to the company before they will intervene. A comment of the court in Wills v Wood (1984) 81 LSG 1211 suggests also that a court should be disinclined to make an order unless it considers that the terms reflect a substantial imbalance of bargaining power between the parties. 159

5.6  Antecedent transactions The judgment of Floyd J in White v Davenham Trust Ltd [2010] EWHC 2748 (Ch) contains a useful resummary of the law here.

5.5.2  What orders can the court make? An order made by the court may do any one or more of the following, as the court thinks fit: •

set aside the whole or part of any obligation created by the transaction;

•

otherwise vary the terms of the transaction, or vary the terms on which any security for the purposes of the transaction is held;

•

require any person who is or was a party to the transaction to repay to the officeholder any sums paid to that person to the company;

•

require any person to surrender to the officeholder any property held by that person as security for the purposes of the transaction; and/or

•

direct accounts to be taken between the parties.

5.6  FLOATING CHARGES FOR NO NEW VALUE 5.6.1  When will a floating charge be invalid? Under s  245  IA  1986, a floating charge on a company’s undertaking or property which was created at a ‘relevant time’ will be invalid upon the company’s liquidation or administration except to the extent that ‘new value’ was received by the company. Note that this section applies only to floating charges. The scope for its application is still wide, given that (as discussed in Chapter 2) a floating charge means a charge which, as created, was a floating charge regardless of whether it may subsequently have crystallised. However, it will not apply to charges which were genuinely created as fixed charges. A charge is granted at a relevant time if: •

(where the person in favour of whom the charge was created is not connected with the company) the company is unable to pay its debts at that time, or becomes unable to pay its debts in consequence of the transaction in which the charge is created; and

• the onset of insolvency occurs within 12 months (or, if the company and the person in favour of whom the charge is created are connected, within two years) after the company creates the charge, or if the charge is created between the date on which an administration application was made or notice of intention filed and the date of the appointment of the administrator. Where the charge is created in favour of a person connected with the company there is no requirement that the company must have been unable to pay its debts at the time the charge was created. Section 245 does not make it clear where the burden of proof lies in other cases, but it has been suggested that, by analogy to the earlier legislation on which this provision is based, it is for the person seeking to uphold the charge to establish solvency. Section 5.8 considers when a person is connected. 160

Antecedent transactions 5.6 Floating charges for no new value – summary A charge cannot be invalid under s 245 IA 1986 if: •

it is a fixed, rather than a floating charge; or

•

where the company and the chargeholder are unconnected, the company was able to pay its debts at the date of the charge, and remained so immediately afterwards; or

•

no administration or liquidation process is successfully instigated for at least a year after the date on which the charge was granted (unless the chargeholder is connected to the company, in which case this time period is two years).

Even if none of the above assists, the charge will not be invalid to the extent that it secures new value.

5.6.2  What is ‘new value’? For these purposes, new value means: • the value of so much of the consideration for the creation of the charge as consists of money paid, or goods or services supplied, to the company at the same time as, or after, the creation of the charge; • the value of so much of that consideration as consists of the discharge or reduction, at the same time as, or after, the creation of the charge, of any debt of the company; and • the amount of such interest (if any) as is payable on the amount of the consideration referred to above in pursuance of any agreement under which the money was so paid, the goods and services were so supplied or the debt was so discharged or reduced. The meaning of at the same time as was considered in Re Shoe Lace Ltd, Power v Sharp Investments [1993] BCC 609. The court held that, where no existing charge had been created by any agreement or company resolution prior to the execution of the formal debenture, then moneys advanced before the execution of the debenture would not constitute ‘new value’ unless the interval between payment and execution was so short that it could be regarded as de minimis (such as a ‘coffee break’). Clearly, therefore, floating charges created with the aim of securing pre-existing indebtedness are likely to be at risk. The court in Shoe Lace did identify, however, that a binding agreement to create a debenture may create an immediate equitable charge, even if formal execution of the debenture only takes place later. Nonetheless, a person seeking to argue that such a charge was created needs to bear in mind that the registration requirements for any such charge will also apply from the date of its creation. The court will look at whether new value has genuinely been received by the company. Thus a refinancing may not create new value if the incoming payment is matched by an outgoing payment, or payments, by the company in the same amount (Re Destone Fabrics [1941] Ch 319). In Re Fairway Magazines Ltd [1992] BCC 924, payments made by a lender directly to the company’s bank which reduced its overdraft were held not to be new value since the company was never able to make use of the monies 161

5.7  Antecedent transactions as it liked, although this decision has been criticised as the payment did reduce a debt of the company. Where a floating charge is taken to secure a pre-existing overdraft, subsequent payments into the overdrawn account are treated as satisfying the earlier indebtedness first, and subsequent drawings are regarded as constituting new value (Yeovil Glove Co Limited [1965] Ch 148, following the rule in Clayton’s case). The turnover on the account thus progressively converts old indebtedness into new. This is another route by which the charge may ‘harden’. The value of any services supplied must be viewed objectively and requires a valuation with the benefit of hindsight of the work that has actually been done and the amount of money which at that time the services were provided the other party could reasonably have expected to have been paid for that work. The fact that an agreement between the company and another party stipulated a fixed fee for providing the services did not mean that that fee represented their true value (Re Peak Hotels and Resorts Ltd [2019] EWCA Civ 345).

5.7  DISTRIBUTIONS POST-PRESENTATION OF WINDING-UP PETITION 5.7.1  In what circumstances will a disposition be avoided? Under s 127(1) IA 1986, in a compulsory liquidation: •

any disposition of the company’s property, and

•

any transfer of shares or alteration in the status of the company’s members,

made after the commencement of the winding-up is void unless the court orders otherwise. The commencement of the winding-up is defined in s 129 IA 1986. In most cases it will mean the date of presentation of the winding-up petition. However, if the winding-up petition is presented by a creditor after the company has already passed a resolution for voluntary winding-up it will mean the date this earlier resolution was passed. If the court elects to make a winding-up order on the hearing of an administration application, it will mean the date of the order. However, this section has no effect in respect of anything done: •

by an administrator of a company while a winding-up petition is suspended under para 40 Sch B1 IA 1986 (s 127(2) IA 1986); or

•

subject to very specific exceptions, during a Part A1 Moratorium where the winding-up order was made on a petition presented before the moratorium began (s 127(3) IA 1986).

This reflects the fact that creditors benefit from other protections during those processes.

5.7.2  What is a disposition of the company’s property? The term disposition is not defined. However, its meaning is wide enough to cover not only gifts, sales or payments by the company, but other transactions by which the 162

Antecedent transactions 5.7 company gives up some existing right, or creates new rights in favour of a third party, in respect of one of its assets. It makes no difference for these purposes whether or not full value is received by the company in return for the disposition in question, although this may influence the court in deciding whether to validate the transaction (see Section 5.7.3). The property in question must be that of the company. However, it need not be the company itself which disposes of the property; in Akers v Samba Financial Group [2017]  UKSC  6 a disposition by a trustee of shares in which the company had a beneficial interest amounted to a disposition of the company’s property. The courts have given particular consideration as to whether payments both into and out of a company’s bank account constitute a disposition of its property (see Section 5.7.4). For this reason, a company’s bank may well freeze its accounts if they learn of the presentation of a petition unless or until the petition is withdrawn or the court grants an appropriate validation order.

5.7.3  When will a court ‘order otherwise’? The legislation gives no guidance here, but the courts have set out various general principles. In Denney v John Hudson [1992]  BCC  503, the Court of Appeal indicated that: •

The discretion of the court is at large.

•

The basic principle is of pari passu distribution.

•

In determining whether a validation order should be made, the court should ensure that the interests of the unsecured creditors are not prejudiced.

•

The court should not, except in special circumstances where it was in the interests of creditors generally, validate a transaction which would result in one or more pre-liquidation creditors being paid in full where others would not.

•

A disposition carried out by the parties in good faith at a time when they were unaware that a petition had been presented should normally be validated unless there are grounds for thinking that the transaction was an attempt to prefer the disponee.

However, whilst a powerful factor, good faith is not sufficient in itself. In Denney, the essential further questions to ask were: •

Were the parties acting in the ordinary course of business? and

•

Were the relevant transactions likely to be for the benefit of creditors generally?

Therefore payments to suppliers which enabled a trading company in turn to obtain further supplies and thus to continue trading would normally be validated. In practice, an application for validation will most often be made after the windingup petition has been gazetted but in advance of any winding-up order, usually on the basis that the company expects the petition to be dismissed when it is eventually heard by the court. The court can make a ‘blanket’ order validating payments made in the general continuance of trading and (for that purpose) the continued operation of the bank account. Before doing so, the court will wish to see suitable evidence that such an order will benefit all creditors. However, provided the court can be convinced that the company is in fact solvent, the onus would normally be on any 163

5.7  Antecedent transactions person opposing leave to persuade the court to justify their position (Re Burton and Deakin Ltd [1977] 1 WLR 390). By way of further recent examples: • In Sahaviriya Steel Industries UK  Limited v Hewden Stuart Limited [2015] EWHC 2726 (Ch), the court made an order validating payments to certain suppliers and of employees’ wages on the basis that successful restructuring or sale as a going concern would further the interests of unsecured creditors as a whole. •

In contrast, in Express Electrical Distributors Limited v Beavis [2016]  EWCA  Civ 765, the Court of Appeal nonetheless refused to make a retrospective validation of payments to one particular supplier and reemphasised that a validation order should only be made in relation to an insolvent company in special circumstances.

Change of position on the recipient’s part is not a defence in itself (Changtel Solutions UK Limited [2022] EWHC 694 (Ch). Practice Direction – Order under section 127 Insolvency Act 1986 [2007] BCC 837 and Practice Direction: Insolvency Proceedings [2020] BCC 698 between them give directions in relation to such an application. They deal, among other things, with what evidence is required, urgent applications and the standard of proof required.

5.7.4  Payments passing through the company’s bank account Various cases have considered the consequences of payments passing through a company’s bank account following the presentation of a petition. Here, the courts and commentators have separately considered: •

payments into and payments out of the account;

•

accounts in credit and accounts which are overdrawn; and

•

payments in cash and payments by cheque

so there are a number of situations to review.

5.7.4.1  Payments into an account in credit This area has given rise to some debate. On a strict analysis, when moneys are paid into an account in credit, the moneys in question will not become (or remain) the property of the customer. The bank will instead become indebted to the customer for the sum in question. The question is therefore whether, on such an analysis, the payment in is a disposition of the company’s property. It has been held that where a company pays a cheque into its account, this is not a disposition of the company’s property to the bank and is not therefore rendered void. The property disposed of is that of the drawer of the cheque, and all that happens between the company and the bank is an adjustment of entries in the statement recording the account (Re Barn Crown Ltd [1995] 1 WLR 147). This analysis has been questioned by commentators on the basis that there must still be a transfer of some asset by the customer to the bank in turn for the bank’s promise of repayment. 164

Antecedent transactions 5.7 If the company holds free cash which it subsequently pays into its account, however, it seems that this must be a disposition of the company’s own property and, unless the court is prepared to validate the payments, they should be recoverable by a liquidator.

5.7.4.2  Payments into an overdrawn account The position is much clearer when monies are paid into an overdrawn account. By reducing its overdraft and therefore its debt to the bank, the company is transferring property to the bank in the amount of the cash or cheque in question (Re Gray’s Inn Construction Co Limited [1980] 1 WLR 711). Unless the court is prepared to validate the payments, they can therefore be recovered by a liquidator. In Re Tain Construction Limited [2003] 2 BCLC 374, the court declined retrospectively to validate payments into an overdrawn account even where they had been made in the ordinary course of business and at a time before the petition had been advertised. It regarded these factors as material, but not decisive. Here, the court was influenced by the fact that one of the company’s directors had personally guaranteed its liability to the bank so there was a suggestion of preference. The court also rejected an argument that the validation order was justified because the bank had changed its position to its detriment. (It had released a charge in support of the guarantee in the belief that the overdraft had been discharged.)

5.7.4.3  Payments out of an account in credit A withdrawal from an account in credit is regarded as a disposition of the company’s property. However, this begs the further question of whether the money is recoverable from the payee, the bank, or both. In Hollicourt (Contracts) Ltd v Bank of Ireland [2001] Ch 555 the Court of Appeal held that only the payee can be liable, as they are the only recipient of the disposition. The bank acts merely as an agent of the customer and in making the payment is simply carrying out the customer’s instructions.

5.7.4.4  Payments out of an overdrawn account In Re Gray’s Inn Construction Co Limited, the court took the view that payments out of an overdrawn account could equally be dispositions of the company’s property. This approach has also been followed in later cases although its logic has been criticised by commentators on the basis that, where the account is overdrawn, the money disposed of is not the customer’s but the bank’s. Again, following Hollicourt (Contracts) Ltd v Bank of Ireland, only the payee and not the bank will in practice be liable in respect of such payments.

5.7.5  Who benefits from the proceeds of the action? Unlike recoveries under various other actions, sums recovered by a liquidator under s 127 IA 1986 are deemed to have remained the property of the company throughout. It is this fact which gives the liquidator the ability to recover them. Therefore where the company’s assets are subject to a floating charge, the charge will continue to attach to the recovered property (see Mond v Hammond Suddards (No  2) [2000] Ch 40). 165

5.8  Antecedent transactions

5.8  WHO IS A ‘CONNECTED’ PERSON? The Insolvency Act uses the term ‘person’ to mean a legal person, including both a company and an individual. Under s 249 IA 1986, a person is connected with a company if: •

they are a director or shadow director of the company, or are an associate of such a director or shadow director; or

•

they are an associate of the company.

This begs the question of what is meant by an associate, and this term is defined in s 435 IA 1986. A company is an associate of another person if that person has control of it or if that person and persons who are that person’s associates together have control of it. A company is also specifically defined to be an associate of another company: •

if the same person has control of both companies, or a person has control of one company and persons who are that person’s associates, or that person and persons who are their associates, have control of the other company; or

•

if a group of two or more persons has control of each company, and the groups either consist of the same persons or could be regarded as consisting of the same persons by treating (in one or more cases) a member of either group as replaced by a person of whom they are an associate.

The definitions in turn beg two further questions: the meaning of control, and the question of when a person is associated with another person. A person is taken as having control of a company if: •

one or more directors of the company, or of another company which has control of it are accustomed to act in accordance with that person’s directions or instructions; or

•

that person is entitled to exercise, or control the exercise of, one-third or more of the voting power at any general meeting of the company or of another company which has control of it.

(Note, in relation to the first criterion above, that there is subtle distinction between this and the criteria for being a shadow director. Here it is sufficient if only one of the directors is accustomed to act in accordance with that person’s instructions.) A person is an associate of another person if: •

that person employs or is employed by that other person (and, for these purposes, a director or other officer of a company is treated as employed by that company);

•

that person is in partnership with that other person, or that other person is the husband or wife or civil partner or a relative of any individual with whom that person is in partnership;

•

that person is a trustee of a trust (other than a pension scheme or an employees’ share scheme), and the beneficiaries of that trust include, or the terms of that trust confer a power that may be exercised for the benefit of, that other person or an associate of that other person. 166

Antecedent transactions 5.8 In addition, a person is specifically defined to be an associate of an individual if that person is: •

the individual’s husband or wife or civil partner;

•

a relative of the individual or the individual’s husband or wife or civil partner; or

•

the husband or wife or civil partner of a relative of the individual or the individual’s husband or wife or civil partner.

A person is a relative of an individual if they are that individual’s brother, sister, uncle, aunt, nephew, niece, lineal ancestor or lineal descendant. This definition is a wide one: relationships of half blood are regarded as being of full blood, stepchildren and adopted children are included as children, and illegitimate children are regarded as legitimate children of their mother and reputed father.

Examples of ‘connected’ persons: •

A lender holds more than one-third of the voting shares in the company following a debt to equity swap. The lender will now be connected as it is has ‘control’.

•

A person holds more than one-third of the voting shares in an intermediate holding company which in turn holds half of the voting shares in a joint venture company with an outside party. The person will have ‘control’ over the joint venture company.

•

An investor holding less than one-third of the voting shares appoints one of its employees as a director of a company to protect its investment. The investor is a connected person on at least one, and possibly two bases here. First, the investor will be an associate of its employee, and therefore connected to the company by virtue of being an associate of a director of the company. Secondly, if the investor gives instructions to its appointee director, it will be connected by virtue of having ‘control’.

In contrast, the following are examples where the circumstances concerned do not in themselves mean that the persons are connected: •

A  lender holds a large number of non-voting preference shares in the company following a debt to equity swap. Preference shares which are non-voting do not contribute towards ‘control’, regardless of how many may be held. (In practice the situation is often complicated by the fact that the preference shares are given voting rights in certain circumstances, for example, if a dividend is unpaid. However, practitioners tend to take the view that this fact in itself should not give the holder ‘control’, notwithstanding the reference in s 435(10)(b) IA 1986 to the exercise of one-third or more of the voting power at ‘any’ general meeting.)

•

An investor holding less than one-third of the voting shares appoints one of its employees as an observer to the company’s board (assuming that the observer is careful not to render themselves a shadow director by giving instructions to the board).

167

Chapter 6

Position of directors

6.1 INTRODUCTION As will be discussed in more detail in Chapter 11, a company, or group of companies, may face financial difficulty for a variety of reasons. Sometimes the difficulties will have been apparent for some time, for example, where they result from poor trading which eventually leads to the company’s earnings no longer covering its costs of borrowing and other overheads. Alternatively, it might be a sudden catastrophic event or change of circumstances which is the cause, such as the loss of a key customer or supplier (perhaps through their own insolvency). Directors faced with difficulties may be tempted to struggle on in the hope (or unrealistic belief) that things will turn round until, faced with a cash crunch – such as an inability to meet the month-end payroll – there is no further room for prevarication. Leaving things to the last moment is of little benefit to the company’s creditors, as it may leave insufficient time to find a solution. As insolvency law has developed, it has aimed to encourage directors to seek help and advice earlier, and thus minimise losses to creditors. In general, the adverse consequences for directors described in this chapter only occur if the company has first entered into a formal insolvency process. In some cases, it will be possible to reach an agreement with stakeholders which allows the company’s (or the group’s) debts to be restructured outside of any formal insolvency process, and it may well be that the earlier negotiations start, the greater the chances of achieving this. However, a restructuring may not prove possible without placing one or more companies in the group into a formal insolvency process as part of a preplanned strategy. In other cases, a restructuring may not prove possible at all, with the result that the company enters into an unplanned formal insolvency. Therefore directors will remain mindful of these possible consequences until any restructuring has been implemented.

6.2  WHO IS A ‘DIRECTOR’? 6.2.1  De jure directors Anyone duly appointed as a director in accordance with the company’s articles of association is clearly a director (whether or not their details have been registered at Companies House).

6.2.2  De facto directors The term ‘director’ is defined in s 251 IA 1986 to include ‘any person occupying the position of director, by whatever name called’. In Smithton Limited v Naggar 168

Position of directors 6.2 [2014] EWCA Civ 939, the Court of Appeal noted that the question was whether the person involved was part of the corporate governance system of the company and whether they assumed the status and function of a director. A number of points arose out of previous cases, which were of general practical importance in this regard: •

The concepts of shadow director (see Section 6.2.3) and de facto director are different but there is some overlap.

•

A person might be a de facto director even if they had not been validly appointed as a director. The question was whether they had assumed responsibility to act as a director. To answer that question, the court may have to determine in what capacity the director was acting.

•

The court will, in general, also have to determine the corporate governance structure of the company so as to decide in relation to the company’s business whether the person’s acts were directorial in nature.

•

The court is required to look at what the director actually did and not any job title given to them.

•

A person does not avoid liability if they show that they in good faith thought they were not acting as a director. The question whether or not they acted as a director is to be determined objectively and irrespective of their motivation or belief.

•

The court must look at the cumulative effect of the activities relied on. The court should look at all the circumstances ‘in the round’. Nevertheless, it is also important to look at the acts in their context. A single act might lead to liability in an exceptional case.

•

Relevant factors include whether the company considered that person to be a director and held them out as such, and whether third parties considered that they were a director.

•

The fact that a person is consulted about directorial decisions or their approval does not, in general, make them a director because they are not making the decision.

•

Acts outside the period when that person is said to have been a de facto director may throw light on whether they were a de facto director in the relevant period.

Anyone involved in management decision-making of the kind conventionally dealt with at board level might fall into this category. Persons who might therefore fall into this category without so intending include: •

a person who formally attends board meetings as an observer, but in practice takes an active role in the directors’ decision-making processes;

•

a person who controls the operation of the company’s bank account and decides which creditors are to be paid and in which order (Re Tasbian Ltd (No 3) [1992] BCC 358); and

•

a person held out as a director, for example by inclusion of the word ‘director’ in their job title or on their business card. (This is less likely where there is a functioning board at which key management decisions are taken and the person concerned is not entitled to participate in this.)

Directors appointed by investors and other non-executive directors often sit on the board of a group’s main holding company only. However, these persons may 169

6.2  Position of directors nonetheless be seen as de facto directors of the trading subsidiaries if in practice decisions as to how those subsidiaries run their affairs and manage their creditors are taken by the board of that holding company. In Revenue and Customs Commissioners v Holland [2010] UKSC 51, the Supreme Court held (by a 3:2 majority) that a person who was director of a company, which in turn served as a corporate director of a second company, would not automatically be considered a de facto director of that second company simply by virtue of the fact that they were the guiding mind of the company which was its corporate director.

6.2.3  Shadow directors A ‘shadow director’ is defined in s 251 IA 1986 as a person in accordance with whose directions or instructions the directors of the company are accustomed to act (but so that a person is not deemed a shadow director by reason only that the directors act on advice given by them in a professional capacity). Many provisions of both the IA 1986 and the CDDA 1986 are stated to apply to shadow directors just as they do to ‘real’ directors. In addition, s 170(5) CA 2006 makes it expressly clear that the general duties of a director apply to a shadow director of a company where and to the extent that they are capable of so applying. The purpose is to ensure that the same sanctions are available against an individual or entity who, without themselves being on the board, effectively tells the board what to do. The Court of Appeal has made a number of statements about the statutory definition of shadow director (Secretary of State for Trade and Industry v Deverell [2000] 2 All ER 365): •

the definition should not be strictly construed;

•

the purpose of the legislation is to identify those, other than professional advisers, with real influence in the company’s corporate affairs, but this influence does not have to be over the whole field of its corporate activities;

•

whether a communication is classed as a ‘direction or instruction’ has to be objectively ascertained by the court in the light of all the evidence;

•

non-professional advice might come within the statutory definition (company doctors may, for example, therefore be in an ambiguous position); and

•

a person can still be a shadow director even if the board has not adopted a subservient role to them or has not surrendered its discretion.

However, in determining whether a person is a shadow director, the courts will look at the frequency with which instructions were given and whether such instructions tended to be acted on. Furthermore, in McKillen v Misland (Cyprus) Investments Ltd [2012] EWHC 521 (Ch) it was made clear that it was unnecessary that all of the directors of the company act in accordance with the instructions; it was enough that a majority did. Persons who are unlikely to fall within the definition, provided they do not exceed their normal role, include: •

A shareholder appointing a single nominated member of the board who acts in accordance with that shareholder’s wishes. A shadow director must effectively give instructions to the majority of the directors, not merely to an individual director. However, the shareholder is at risk if the board as a whole acts as they direct. 170

Position of directors 6.3 •

A bank lender. There was initial concern among banks when the legislation was first passed. In practice, however, this concern has proved largely unfounded. A bank should be less at risk if it presents its requirements as conditions for its further support rather than as outright instructions.

•

A  lawyer or accountant advising the company. They will fall within the ‘professional capacity’ exception provided they merely advise and leave the commercial decisions to the board.

In addition, even when a court finds that a person is a shadow director, there may still be limits to the circumstances where it will impose a liability on them. For example: • in Instant Access Properties Limited v Rosser [2018]  EWHC  756 (Ch), the court considered the fiduciary duties owed by a shadow director but concluded that it should not impose a liability on them where a de jure director would have been relieved from liability under s 1157 CA 2006; • in Standish v Royal Bank of Scotland plc [2019]  EWHC  3116 (Ch), a case where the claimants alleged that an employee of the bank’s subsidiary had given instructions to directors on which they felt compelled to act, the court held that where a shadow director had given instructions only in respect of some part of the company’s activities, their fiduciary duties would be limited to those matters and would not extend to the full range of the company’s activities.

6.2.4  Non-executive directors An executive director will be a full-time employee engaged in the day-to-day management of the company. A non-executive director will devote only part of their time to the company’s affairs. They are nonetheless a director, and therefore have the same general duties as does an executive director.

6.3  DIRECTORS’ DUTIES 6.3.1  What are a director’s general duties? The general duties of a director are set out in ss 171–177 CA 2006 and comprise: •

A  duty to act in accordance with the company’s constitution and only to exercise powers for the purposes for which they are conferred (s 171).

•

A duty to act in the way the directors consider in good faith would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so having regard (among other matters) to six listed considerations. These include the interests of the company’s employees and the need to foster the company’s business relationships with suppliers, customers and others (s 172, but see below).

•

A duty to exercise independent judgement (s 173).

•

A duty to exercise reasonable care, skill and diligence (s 174).

•

A duty to avoid a situation in which they have, or can have, direct or indirect interests that conflict, or possibly may conflict, with the interests of the company (s 175). 171

6.3  Position of directors •

A duty not to accept benefits from third parties conferred by reason of their being a director or their doing (or not doing) anything as a director (s 176).

•

A duty to declare to the other directors the nature and extent of any direct or indirect interest they have in any proposed transaction or arrangement with the company (s 177).

6.3.2  To whom are the duties owed? The directors’ general duties are owed to the company. When a company is solvent, the directors must have regard predominantly to the interests of the members in discharging their duties. However, when the company is unable to pay its debts, the directors duty to act in the best interests of the company requires them to take account of the interests of the creditors as a whole (West Mercia Safetywear Ltd v Dodd [1988] BCLC 250), because it is they who will now stand to gain or lose most according to the actions the directors take. This is expressly recognised by s 172(3) CA 2006, which provides that the duty set out in that section (as described in Section 6.3.1) has effect subject to any rule of law requiring directors, in certain circumstances, to consider or act in the interest of creditors of the company. In this context, the directors of a company which is unable to pay its debts might be regarded as having certain additional duties, such as a duty to avoid entering into transactions at an undervalue and a duty to avoid giving preferences, since a breach of these duties will impact on the creditors (see Section 6.4.4). In BTI 2014 LLC v Sequana SA [2022] UKSC 25, the Supreme Court clarified when this shift towards the interests of creditors would be triggered. It arises when the directors know or ought to know: •

that the company is or is bordering on becoming unable to pay its debts on either the cashflow or the balance sheet basis; or

•

it is probable that the company will enter insolvent liquidation or administration.

In a move away from the earlier Court of Appeal decision on the same case, it does not arise merely because a company is more likely than not to become unable to pay its debts. The content of the directors’ duties, once triggered, will depend on the extent of the company’s financial difficulties. If the company is or is bordering on becoming unable to pay its debts but entry into insolvent liquidation or administration is not yet inevitable, the directors will need to balance the interests of the creditors against the interests of the company’s members. The greater the company’s financial difficulties, the more the creditors’ interests will need to be prioritised. Once an insolvent liquidation or administration is inevitable the interests of the creditors is paramount. Although the majority of the Supreme Court formulated the test based on what directors knew or ought to have known, one judge, Lady Arden questioned whether that was necessary as directors ought to keep themselves informed of the financial position of the company. In her view the onus would be on the directors to show why they ought to be reasonably excused if they let a breach of their duty occur due to not being informed. Lady Arden’s unsympathetic approach to uninformed directors 172

Position of directors 6.4 is not binding. However, it is nonetheless advisable that directors ensure they have access to reliable financial reporting and require the communication to them of a deterioration in the company’s financial position.

6.3.3 Ratification In a solvent company, the acts of the directors may still be ratified by the members. Where a company is insolvent, however, because of the shift towards the interests of creditors, this remedy cannot be relied upon (see the Sequana case).

6.3.4  Groups of companies Groups of companies present a particular issue here. The distinction between companies within a group is often blurred where the group is solvent and managed effectively as a single unit. Elaborate structures may be set up for administrative or tax-planning reasons and transactions between group members may take place on terms which would not be offered to external third parties. Specific group members may employ the group workforce, or own its buildings, and make these available on cost cover terms only to other members of the group. Payments between group members may well not be settled regularly in cash, but give rise to intercompany debts and credits. However, arrangements which are legally unobjectionable within a solvent group may cease to be so when companies within the group become unable to pay their debts. The directors of each company must act in relation to each company without regard to their duties as directors of other group companies. This may of course give rise to particular difficulties where duties owed to different companies within a group conflict, and in those circumstances it may become necessary for directors to relinquish multiple directorships. In practice, the success of one company in a group may depend on the success of another, either because the assets of the first substantially comprise shares in or debts owed by the second, or the first has guaranteed the debts of the second (as is commonly the case where group borrowing arrangements are in place). In these circumstances the strategic interests of all companies within the group may well be the same. Nonetheless, the directors of each company must have primary regard to the effect which actions taken, or permitted, by that individual company may have on the creditors of that company, rather than the creditors of other companies within the group or the overall solvency of the group as a whole.

6.4  RISKS TO DIRECTORS 6.4.1 Overview The risks to directors who continue to trade an insolvent company fall into three main categories: •

a risk of civil liability to pay financial compensation out of that director’s own personal resources;

•

a risk of disqualification from acting as a director; and 173

6.4  Position of directors •

a risk of criminal liability.

In many cases, these categories will overlap. For example: •

where a director is disqualified they may also be ordered to pay compensation;

•

a court which finds a director liable for wrongful trading may also disqualify them from acting as a director; and

•

a director found liable for fraudulent trading may subsequently also be prosecuted.

6.4.2  Wrongful trading 6.4.2.1  What are the risks here? A director may be held personally liable to contribute to a company’s assets if they allow the company to continue trading at any time when they know or ought to conclude that there is no reasonable prospect that the company will avoid entering into insolvent administration or going into insolvent liquidation. For these purposes: •

‘insolvent administration’ means that it enters into administration at a time when its assets are insufficient for the payment of its debts and other liabilities and the expenses of the administration; and

•

‘insolvent liquidation’ means that it goes into liquidation at a time when its assets are insufficient for the payment of its debts and other liabilities and the expenses of the winding up.

The point where the director reaches, or ought to reach, this conclusion is often termed the ‘critical date’. An action for wrongful trading can only be brought by: •

the administrator of a company which has subsequently gone into insolvent administration (s 246ZB IA 1986); or

•

the liquidator of a company which has subsequently gone into insolvent liquidation (whether voluntary or compulsory) (s 214 IA 1986).

The administrator or liquidator bringing an action will need to identify some date as the critical date (Re Sherborne Associates Ltd [1995]  BCC  40). For example, this may be the date on which the directors knew, or ought to have concluded that there was no longer any reasonable prospect that funding required by the company in order to continue to trade would be available (see for example, Roberts v Frohlich [2011] EWHC 257 (Ch)). The concept of a critical date, however, means that a director is not liable for wrongful trading simply because the company has been trading whilst insolvent. This important distinction is discussed further in Section 6.5.1.

6.4.2.2  What standards are expected of the director? Under ss 246ZB(4) and 214(4) IA 1986 respectively, the standard to be applied by the court in deciding whether a director has been guilty of wrongful trading is that of a ‘reasonably diligent person’ having: 174

Position of directors 6.4 •

the general knowledge, skill and experience which may reasonably be expected of a person entrusted with carrying out the same functions as are carried out by that director in relation to the company; and

•

the general knowledge, skill and experience which that director actually has.

A  director will therefore be judged both objectively (they must show the abilities which the reasonable director holding their position would be expected to have, regardless of their own ability) and subjectively (the more experienced director must show a higher standard of competence). In Singla v Hedman [2010] EWHC 902 (Ch), the court refused to accept an argument that the standard of responsibility expected of a director was lower in an inherently risky industry, such as the film industry. Further, a director will be judged in relation to the functions which have been entrusted to them even if, in fact, they failed to carry them out. Each director will be judged individually according to these tests. Higher standards may apply to some than to others on the same board. The sales director might not be expected to be as familiar with the details of the company’s day-to-day cash movements as the finance director. However, every director shares a responsibility for ensuring that the company is capable of surviving financially, and this responsibility cannot simply be left to one or two individuals on the basis that it is their job, not the job of others. At the very least, there is an obligation to ensure that proper financial management is being exercised by someone with appropriate expertise.

6.4.2.3  What defences are available? There is a specific statutory defence to a wrongful trading action. The court will not find a director liable if it is satisfied that, once that director knew or ought to have concluded that there was no reasonable prospect of the company avoiding insolvent liquidation, they took every step which they ought to have taken to minimise the potential loss to the company’s creditors (ss  246ZB(3) and 214(3)  IA  1986 respectively). The steps to be taken are those which a director with the objective (ie reasonably expected) and subjective (ie actual) levels of knowledge, skill and experience which that director has, or is expected to have, ought to take if they knew that there was no reasonable prospect of avoiding insolvent liquidation (see Section 6.4.2.2). A director will not, however, be able to obtain relief from a wrongful trading action under s  1157  CA  2006 on the basis that they acted honestly and reasonably (Re Produce Marketing Consortium Ltd [1989]  BCLC  513). The courts have also emphasised that the need to take ‘every step’, as opposed to ‘every reasonable step’, sets a high bar generally for a director seeking to use this defence (see, for example, Re Ralls Builders Limited (in liquidation) [2016] EWHC 243 (Ch)).

6.4.2.4  What will be the extent of the director’s liability? Section 214 does not specify a means by which the director’s contribution is to be calculated, so this is left to the court’s discretion. In Re Produce Marketing Consortium Ltd (No 2) [1989] BCLC 520, however, it was made clear that the court’s jurisdiction here was primarily compensatory rather than penal. Without seeking to limit the court’s discretion, the appropriate amount that a director was to be declared 175

6.4  Position of directors liable to contribute was the amount by which the company’s assets could be seen to have been depleted by the director’s conduct. In practice the amount the director may be obliged by the court to pay is likely to be based on the amount by which the losses to the company’s creditors have increased after the critical date. There is a distinction between creditors whose positions would have worsened anyway, regardless of the director’s actions, and creditors who might have been protected had the director ceased trading earlier. The first category might include lenders who have advanced term loans to the company, where the principal sum has not increased after the critical date, and where interest would have continued to accrue at the same rate (until payment), even had the directors placed the company into a formal insolvency process earlier. This second category, however, might include persons who have delivered further goods or provided further services after the critical date but who remain unpaid. This category might include not only trade suppliers but also, for example, providers of utilities and the company’s employees. It is this second category which will be most relevant here. The approach of the courts is now to look at whether the directors’ decision to continue trading after the critical date caused any net loss to these creditors overall, rather than look at whether individual creditors might have suffered a loss. In Re Ralls Builders Limited (in liquidation) [2016]  EWHC  243 (Ch), for example, the court ruled that the directors ought to have concluded that there was no reasonable prospect of avoiding insolvent liquidation six weeks before the company actually entered administration and that the directors were unable to take advantage of the defence described in Section 6.4.2.3. Nevertheless, it declined to order that the directors make any contribution to the assets of the company on the basis that the liquidators had been unable to show that the continued trading had caused any increase in the net deficiency of the company. As a result of certain provisions introduced during the Covid-19 pandemic, save where the company falls within one of the types listed in Sch ZA1  IA  1986, the court is also required to assume that directors were not liable for any worsening of the financial position of the company or its creditors that occurred during the periods 1 March 2020 to 30 September 2020 or 26 November 2020 to 30 June 2021 (s 12 CIGA 2020). Regardless of the method by which a director’s liability is calculated, any compensation paid by the directors will go to the administration or liquidation funds for the benefit of creditors generally. It will not be payable only, for example, to those creditors directly prejudiced by the wrongful trading. As in the cases of awards made where a court sets aside an antecedent transaction (see Chapter 5), the award will also not be caught by a secured creditor’s floating charge (s 176ZB IA 1986). At the same time as making an order imposing personal liability, the court may disqualify a director from acting as a director.

6.4.3  Fraudulent trading 6.4.3.1  What are the risks here? If, while a company is in administration or in the course of a liquidation, it is established that the business has been carried on with intent to defraud creditors, 176

Position of directors 6.4 the court may order that any persons who were knowingly party to carrying on the business in this way are to be personally liable to make such contributions (if any) to the company’s assets as the court thinks proper (see s 246ZA IA 1986 in respect of an administration and s 213 IA 1986 in respect of a liquidation). The court gave a helpful analysis in Bilta UK  Limited (in liquidation) v NatWest Markets plc [2020] EWHC 546 at [175]–[192] of the type of persons who might, in addition to the directors, be ‘knowingly party’. (Although the decision in this case was later overturned by the Court of Appeal on other grounds, this analysis remains valid.) In contrast to the wrongful trading provisions described in Section 6.4.2, fraudulent trading requires the administrator or liquidator to prove some element of dishonesty on the part of the persons in question, as discussed further in Section 6.4.3.2. Despite the need to prove dishonesty, s 213 IA 1986 may offer greater scope than s 214 IA 1986 in at least two ways: •

it encompasses persons other than just directors, provided those persons are ‘knowingly party’, for example in Bank of India v Morris [2005] EWCA Civ 693, the Bank of India was held liable on the grounds that it had been knowingly party to frauds carried on by BCCI; and

•

although the courts have made it clear that, like s 214 IA 1986, the purpose of s 213 IA 1986 is compensatory rather than punitive, a director’s liabilities may still be wider than those described in Section 6.4.2.4 because, among other things, there is no concept of a ‘critical date’.

Creditors of insolvent companies whose directors have made promises to pay may have direct rights of action against those directors in deceit. These rights operate separately from, but in addition to, the provisions of s 246ZA or s 213 IA 1986 (see, for example, Contex Drouzhba Limited v Wiseman [2008] BCC 301 and Lindsay v O’Loughnane [2010] EWHC 529 (QB)). Fraudulent trading may also result in criminal proceedings for which directors found guilty may be fined or even sent to prison (s 993 CA 2006).

6.4.3.2  When is a person ‘dishonest’? For the purposes of s 213 IA 1986, the courts have most recently applied the twostage criminal test for dishonesty outlined in Ivey v Genting Casinos (UK) Limited [2017] UKSC 67: •

The court must first ascertain (subjectively) the actual state of the individual’s knowledge or belief as to the facts. The reasonableness or otherwise of their belief is a matter of evidence (often in practice determinative) going to whether they held the belief, but it is not an additional requirement that their belief must be reasonable; the question is whether it is genuinely held.

•

Once that individual’s actual state of mind as to knowledge or belief as to facts is established, the court must determine whether their conduct was honest or dishonest by applying the (objective) standards of ordinary decent people. There is no requirement that the individual must appreciate that what they have done is, by those standards, dishonest. 177

6.4  Position of directors For these purposes, knowledge includes ‘blind eye’ knowledge. If the court concludes that a person deliberately shut their eyes because of a conscious fear of making further enquiries, this may confirm a suspicion of wrongdoing. However, untargeted, speculative suspicion will not be sufficient. As such, dishonesty may conceivably be inferred where, for example, the directors make deliberately misleading statements about their intentions or take active steps to avoid paying particular debts. It is sufficient that only one creditor has been defrauded in this way. Examples of cases which examine these points further include: •

Morphites v Bernasconi [2003] BCC 540, where the directors devised a scheme to transfer assets to a new company with a similar name but needed to wait 12 months after incorporating their new company (see Section 6.4.5). To avoid the landlord presenting a winding-up petition within this period, they made some initial payments on account but failed to make a further promised payment. In determining that the directors were not liable under s 213 IA 1986, the Court of Appeal held that, although a fraud on a creditor may have been perpetrated in the course of carrying on a business, it did not necessarily follow that the business was being carried on with the intent to defraud.

•

JD Group Limited [2022] EWHC 202 (Ch), one of a number of cases relating to ‘missing trader intra-community (‘MTIC’) fraud’. There are different types of MTIC fraud but, at its simplest, it involves companies taking advantage of the fact that imports and exports of goods between EU Member States are VATfree to collect VAT from purchasers in one state but to avoid accounting for it in any other member state. The only creditor defrauded here was HM Revenue & Customs (‘HMRC’). In this case, the court was able to infer the director’s knowledge and dishonesty in being a participant in MTIC fraud from the uncommercial terms of the company’s various transactions and his deliberate decision not to investigate the supply chain further.

In Jetivia SA  v Bilta (UK) Limited [2015]  UKSC  23 the Supreme Court had to consider whether a claim against directors who were alleged to have been involved in a fraud was barred by the ‘ex turpi causa’ principle, ie that a claimant may not benefit from its own illegal acts. The director argued that company itself had been party to the same fraud and that it was accordingly not open to that company’s liquidators now to bring proceedings against them. However, the Supreme Court felt that the wrongdoing of the directors could not be jointly attributed to the company itself.

6.4.4  Misfeasance or breach of duty Under s 212 IA 1986, if a company has gone into liquidation, the liquidator (or a creditor or contributory) may apply to the court for an order compelling anyone who is or has been an officer of the company (or any other person who has taken part in the promotion, formation or management of the company) and: •

who has misapplied or retained, or become accountable for, any money or other property of the company to repay, restore or account for the money or property or any part of it, with interest at such rate as the court thinks just; or

•

who has been guilty of any misfeasance or breach of any fiduciary or other duty in relation to the company to contribute such sum to the company’s assets by 178

Position of directors 6.4 way of compensation in respect of the misfeasance or breach of fiduciary or other duty as the court thinks just. A  liquidator could use this provision, for example, to pursue directors who have caused the company to enter into transactions at an undervalue, or to give preferences or to pay unlawful dividends (in addition to pursuing the beneficiaries of those transactions or other payments). It may also be used to pursue a straightforward negligence claim. Note that the reference to ‘officers’ of the company will extend to de facto directors but not to shadow directors (Revenue and Customs Commissioners v Holland [2010] UKSC 51). Section 212 IA 1986 creates no new duties on the part of the directors. Its purpose is to provide a simpler procedure for pursuing directors who have breached duties they already have to the company. One consequence of this is that a director will still be able to obtain relief under s 1157 CA 2006 on the basis that they acted honestly and reasonably (see Re D’Jan of London Ltd [1993] BCC 646). Nonetheless, this defence may not allow the directors to retain payments they have received themselves at the expense of the company’s creditors (Re Marini Ltd [2004] BCC 172).

6.4.5  Re-use of company names 6.4.5.1  What are the risks here? If a company goes into insolvent liquidation (whether voluntary or compulsory), it is an offence for a person who was a director of that company at any time during the 12-month period prior to the commencement of the liquidation: •

to be a director of another company known by a prohibited name (see Section 6.4.5.2); or

•

in any way, whether directly or indirectly, to be concerned or take part in the promotion, formation or management of another company known by a prohibited name; or

•

in any way, whether directly or indirectly, to be concerned or take part in the carrying on of a business carried on (other than by another company) under a prohibited name

at any time in the five-year period beginning with the day the insolvent company went into liquidation, unless one of a number of exceptions applies (s 216 IA 1986). The exceptions are discussed in Section 6.4.5.3. Furthermore, a person who is involved in the management of another company: •

in contravention of s 216 IA 1986; or

•

who acts or is willing to act on instructions given by another person who they know to be in contravention of s 216 IA 1986 in relation to that company

will also be personally responsible for all debts and liabilities of that company incurred at a time when they were involved in the company’s management, or acted or were willing to act on the other person’s instructions (as the case may be) (s 217 IA 1986). In practice, this will become relevant only if the other company is unable to discharge these debts and liabilities itself. 179

6.4  Position of directors

6.4.5.2  What is a ‘prohibited name’? A name is prohibited if it is a name by which the insolvent company was known at any time within the 12-month period before the liquidation, or if it is a name so similar as so suggest an association with the insolvent company (s 216(2) IA 1986). Furthermore, references to a name by which a company is known include not only the company’s name, but any trading name under which it carries on business (s 216(6) IA 1986). For example, in Ricketts v Ad Valorem Factors Ltd [2004] BCC 164, the insolvent company was named ‘The Air Component Co Limited’ and the other company ‘Air Equipment Co Limited’. The court held the latter to be a prohibited name. (The court made it clear, however, that it was necessary to make a comparison of the names in the context of all of the circumstances in which they were actually used or likely to be used: the type of product dealt in, the locations of the businesses, the type of customers dealing with the companies and those involved in the operation of the two companies.) The case of ESS  Production Ltd v Sully [2005]  BCC  435 shows that these risks may occur where both the insolvent and the new company allow themselves to be known by a common acronym, in this case ‘ESS’. Sections 216 and 217  IA  1986 were introduced to address the ‘Phoenix trading’ phenomenon, where an insolvent company’s business is sold to a new company controlled by the same individuals, and continues to trade free of its previous debts, whilst benefiting from the goodwill of the insolvent company. They protect creditors of the new company, who might well be unaware of the individuals’ past history, and might otherwise suffer in due course as a result of a second failure. Nonetheless, should a person breach these provisions, their degree of culpability will be irrelevant – the court has no discretion to absolve them, or limit their liability. In the Ricketts case, there was no evidence that anyone had been misled by the similarity of the names. The court recognised that its decision to impose liability was therefore potentially a harsh one, but emphasised that the director concerned could have protected himself by obtaining the prior permission of the court (see Section 6.4.5.3). Directors who carry out a restructuring using a planned formal insolvency therefore need to take care in choosing the name of the purchasing company. However, they may also inadvertently fall foul of these provisions if they are directors of other companies within the same group which have a similar name to the insolvent company (which will not be unusual in a group), unless they can take advantage of an exception.

6.4.5.3  What exceptions will apply? A person will avoid liabilities under ss 216 and 217 IA 1986: •

where the insolvent company’s business is acquired from its liquidator, administrative receiver, administrator or supervisor of its CVA and that person has given notice to every creditor of the insolvent company whose name and address they know, or which is ascertainable on making reasonable enquiries, and also published that notice in the Gazette. This notice must state that person’s intention to act, or continue to act, in the management of the other company, and must also state the prohibited name. They will be protected provided the notice is given within 28 days of completion of the acquisition (rr 22.4 and 22.5 IR 2016); 180

Position of directors 6.4 •

where that person obtains the permission of the court to act, or continue to act, as director of the other company (s 216(3) IA 1986). A director cannot obtain permission retrospectively. However, if they have been acting in breach they can at least seek permission to protect themselves in respect of the company’s future dealings. The legislation also recognises that the court might take time to dispose of such applications. Therefore, provided a director applies for permission within seven days of the date of liquidation, they are protected until the application is determined or until six weeks have elapsed since the date of liquidation (whichever occurs sooner), even if the application for permission is unsuccessful (r 22.6 IR 2016);

•

where the other company has already been known by the prohibited name for the whole of the 12-month period before the insolvent company went into liquidation and has not been dormant within that 12-month period (r 22.7 IR 2016).

However, these exceptions may not afford a complete protection where the company in question has unpaid tax liabilities (see Section 6.4.6).

6.4.6  Claims by HMRC Under Sch  13 of the Finance Act 2020 (‘FA  2020’), HMRC are entitled to serve notice on an individual in certain circumstances involving insolvency or potential insolvency making them jointly and severally liable for amounts payable to HMRC. The intention is to minimise the risk that insolvency is used to avoid paying tax. These circumstances are, broadly speaking: •

where the company has used a tax evasion scheme or a certain type of tax avoidance scheme that HMRC consider aggressive (para 2 Sch 13 FA 2020);

•

where that individual is phoenix trading through a new company (para  3 Sch 13 FA 2020); or

•

where the company is subject to specific penalties for facilitating tax evasion or certain types of tax avoidance (para 5 Sch 13 FA 2020).

For HMRC to be entitled to serve a notice under para 3, ie phoenix trading, there must be at least two companies (the ‘old companies’): •

in respect of each of which the individual had a ‘relevant connection’, ie was a director, shadow director or participator or was otherwise concerned, whether directly or indirectly, or took part in the management, at any time in the fiveyear period ending with the day on which the notice was given;

•

which each became subject to an ‘insolvency procedure’, ie  entered into insolvent liquidation, administration or receivership, became subject to a CVA or Scheme of Arrangement or was dissolved, during that five-year period; and

•

which each either had a tax liability on the date of that procedure, had failed to submit a return or other document or to make a relevant declaration or application to HMRC that it was required to submit or make or, where it had submitted or made a return or other relevant document, an act of omission on the part of the company prevented HMRC from dealing with it.

In addition to their connection with the old companies, that individual must also have, or have had, at any time during that five-year period, a relevant connection with 181

6.4  Position of directors another company (the ‘new company’) which is or has been carrying on a trade or activities that is the same as or similar to a trade or activities previously carried on by two or more of the old companies. Finally at the time the notice is given: •

at least one of the old companies must have an outstanding tax liability; and

•

the total tax liabilities of the old companies must exceed both £10,000 and 50% of their liabilities to their unsecured creditors.

Where HMRC serves a notice under para  3, that individual may be jointly and severally liable with the new company for any tax liability which the new company has on the date of the notice or which arises at any time during the next five years. Although, like s 217 IA 1986, para 3 Sch 13 FA 1986 applies only to liabilities of the new company to HMRC, it may apply even where that director would not face personal liability under s 217 IA 1986. It applies to a greater range of insolvency and quasi-insolvency procedures, has no requirement that the new company be known by a similar name and is not subject to the exceptions described in Section 6.4.5.3.

6.4.7  Disqualification of directors 6.4.7.1  When will a director be at risk of disqualification? Under s 7 CDDA 1986, the Secretary of State for Business, Energy and Industrial Strategy may apply to the court for a disqualification order to be made against: •

any director of a company which has gone into insolvent liquidation, administration or administrative receivership or which has been dissolved without first having gone into any of these procedures (whether while they were still a director or subsequently); and

•

whose conduct (either taken alone or together with their conduct as a director of one or more other companies or overseas companies) makes them ‘unfit to be concerned in the management of a company’.

Under s 6 CDDA 1986, the court is duly obliged to make such an order where it is satisfied that the above criteria are met. The minimum period of disqualification is two years and the maximum period is 15 years. The Secretary of State may only apply for such an order within the three-year period beginning with the day on which the company entered into the relevant procedure or was dissolved, unless that time period is extended by the court (s 7(2) CDDA 1986). In addition, under s 8ZA CDDA 1986, where a disqualification order has been made against a director (but not a shadow director) under s 6 CDDA 1986, or the Secretary of State has accepted a disqualification undertaking (see Section 6.4.6.5) from such a director, the court is also able to make a disqualification order against another person where it is satisfied that the director’s conduct arose from them acting on the second person’s directions or instructions. This differs from the test for a shadow director, in that the second person needs only to have influenced a single director, not the entire board. The courts have interpreted the ‘unfitness’ test in a number of slightly different ways. However, the general strand of thinking seems to be that to qualify for disqualification, 182

Position of directors 6.4 the conduct in question must ordinarily be either dishonest or lacking in commercial probity, or display incompetence to a marked degree. (See, for example, Re Uno plc: Secretary of State for Trade and Industry v Gill [2006] BCC 725.) It is a criminal offence to act in breach of such an order. A  person doing so is also automatically personally liable for the debts of the company involved (s 15 CDDA 1986).

6.4.7.2  Scope of a disqualification order A disqualification order is wide in its scope. It will prohibit a person from: •

being a director of a company;

•

acting as a receiver of a company’s property; or

•

in any way, directly or indirectly, being concerned or taking part in the promotion, formation or management of a company

for as long as the order remains in force (s  1(1)  CDDA  1986). A  management consultant who acted as advisor to the board of a company has therefore, for example, been held to have been ‘concerned in’ and ‘taken part in’ that company’s management (R v Campbell [1984] BCLC 83). A disqualified individual may still work as a company employee, provided they no longer hold themselves out as a director or seek to exercise continuing control behind the scenes. However, disqualification may still have severe repercussions for a person who has previously made their living as a professional director.

6.4.7.3  Compensation orders The Secretary of State may also seek an order requiring a person who is the subject of a disqualification order or who has given a disqualification undertaking (see Section 6.4.7.6) to pay compensation, which may take the form of either a contribution to the assets of the company as a whole, or a payment for the benefit of one of more specified creditors (ss 15A–15C CDDA 1986). In Re Noble Vintners Ltd [2019] EWHC 2806 (Ch), the court considered the principles applicable to this compensation regime. The loss must have been caused by the director’s misconduct, although that misconduct did not need to be the predominant cause. However, liability was not based on loss to the relevant company, but on loss to its individual creditors. As such there was no direct correlation with the remedies available under the IA 1986. This regime potentially enabled recovery where there was wrongdoing which caused no net loss to the company. However, where there were, or might be, IA 1986 proceedings as well, the court would need to consider recoverability and also whether the two regimes were competing for the same pot.

6.4.7.4  What is the role of the insolvency officeholder? The official receiver in a compulsory liquidation, any liquidator in a voluntary liquidation, any administrator, or any administrative receiver has a duty to report, within three months of their appointment, on the conduct of every person who was a director of the company on the date the company entered formal insolvency or at 183

6.4  Position of directors any time during the three-year period prior to that (s 7A CDDA 1986). The Insolvent Companies (Reports on Conduct of Directors) Rules 2016 (SI 2016/180) give further guidance on the reporting process. The Insolvency Service’s own publications (www.gov.uk/government/publications/ company-directors-disqualification-act-1986-and-failed-companies) provide further guidance here, and are useful reading generally. The supervisor under a CVA does not have the same duty to report on every director. They do, however, still have a duty under s 7A IA 1986 to report to the Secretary of State if it appears that any past or present officer of the company has committed an offence in connection with a CVA. This would most obviously include an offence under s 6A IA 1986 (see Section 8.2.2.2).

6.4.7.5  What factors will the court consider? Under s 12C CDDA 1986, the court is required to have particular regard to a list of matters set out in Sch 1 CDDA 1986 when deciding whether to disqualify a director. These are set out in Table 6.1. The present Schedule  1 is a revised version of an earlier schedule, and is more general in its wording than its predecessor. It is likely, however, that the previous case law in determining unfitness will continue to provide good guidance. Types of conduct which the courts have regarded as evidence of unfitness include the following: •

funding continued trading by failing to pay PAYE, national insurance contributions and VAT when due (see, for example, Secretary of State for Business, Innovation and Skills v Cathie [2012] EWCA Civ 739);

•

taking deposits from customers for goods or services not ultimately supplied;

•

misrepresenting the company’s position to suppliers, funders or customers;

•

drawing significant remuneration or other personal benefits when the company was already insolvent, or making irresponsive intra-group loans (see, for example, Official Receiver v Stern (No 2) [2001] EWCA Civ 1787);

•

failing to maintain and retain accounting records and statutory books or to prepare annual accounts;

•

trading with a succession of Phoenix companies;

•

giving preferences or entering into transactions at an undervalue; and

•

failing to comply with the various duties placed on a director once the company is in formal insolvency (as described in Section 6.7).

The court will take into account the extent of the directors’ own responsibility for the matters in question. However, any director has a duty to keep themselves informed, and a director who has played no active part in the running of the company is unlikely to escape liability for disqualification where they have delegated inappropriately or simply relied on occasional verbal assurances from others as to the company’s financial position (see, for example, Secretary of State for Trade and Industry v Thornbury [2008] 1 BCLC 139). 184

Position of directors 6.4 As noted above, the court may make a disqualification order against a director whom it has found liable for wrongful (or fraudulent) trading, even if no application has been made by the Secretary of State. Table 6.1 – Matters to be taken into account in determining unfitness Matters to be taken into account in all cases 1

The extent to which the person was responsible for the causes of any material contravention by a company or overseas company of any applicable legislative requirement.

2

Where applicable, the extent to which the person was responsible for the causes of a company or overseas company becoming insolvent.

3

The frequency of conduct of the person which falls with paragraph 1 or 2.

4

The nature and extent of any loss or harm caused, or any potential loss or harm which could have been caused, by the person’s conduct in relation to a company or overseas company. Additional matters to be taken into account where a person is or has been a director

5

Any misfeasance or breach of any fiduciary duty by the director in relation to a company or overseas company.

6

Any material breach of any legislative or other obligation of the director which applies as a result of being a director of a company or overseas company.

7

The frequency of conduct of the director which falls within paragraph 5 or 6.

6.4.7.6 Undertakings The Secretary of State may, as an alternative to seeking a disqualification order, ask directors to enter into binding undertakings imposing restrictions similar to those available under an order (ss 1A and 7(2A) CDDA 1986). This is regarded as a quicker, cheaper (and perhaps less public) alternative to court proceedings, but the restriction upon an individual’s ability to make a living through the medium of a limited liability company is the same. In recent years, the vast majority of all disqualifications of directors of failed companies have been achieved by way of an undertaking. In a similar way, the Secretary of State may ask directors to give a compensation undertaking rather than seeking a compensation order (s 15A(2) CDDA 1986).

6.4.7.7  Permission to act in certain circumstances It is possible for a director against whom a disqualification order has been made (or who has given an undertaking) to apply to the court for permission to act as a director in particular circumstances notwithstanding their disqualification (s 17 CDDA 1986). Typically, consent will only be given where the court is satisfied both that the director’s involvement in the management of a specific company is desirable, and that safeguards are in place to protect creditors (eg that they will not have sole discretion in relation to financial matters and the company’s management will include other suitably qualified directors capable of exercising financial control).

6.4.8  Criminal liability As noted in Sections 6.4.3 and 6.4.5 respectively, fraudulent trading and reuse of company names may result in criminal, as well as civil, liability. 185

6.5  Position of directors The IA 1986 also includes a number of other provisions under which past or present officers (including directors) may be prosecuted and, if found guilty, fined or sent to prison. Examples of conduct which may result in criminal prosecution are: •

concealing or fraudulently ‘removing’ property belonging to the company worth £500 or more;

•

concealing, destroying, mutilating or falsifying books or records relating to the company (or being privy to anything of the kind being carried out by a third party);

•

pawning, pledging or disposing of property obtained by the company on credit (except in the ordinary course of the company’s business); and

•

failing to disclose, or hand over, to the liquidator property or records belonging to the company.

Another possible pitfall here is the need to inform BEIS where the company is proposing to dismiss as redundant 20 or more employees at one establishment within a period of 90 days or less, as discussed further in Section 10.3.2.5.

6.5  PRACTICAL CONSEQUENCES FOR DIRECTORS 6.5.1 Overview The courts have made it clear that the legislation does not impose a statutory duty on directors to ensure that their company does not trade whilst it has negative net assets or an obligation to ensure that the company does not trade at a loss. The directors may properly take the view in appropriate circumstances that it is in the interests of the company and its creditors that the company should continue to trade out of its difficulties (see Re Ralls Builders Limited (in liquidation) [2016] EWHC 243 (Ch)). Even if the company has negative net assets, if it can expect to pay creditors as they arise from its cash flow or from new capital, it may conceivably continue to trade for some time with the aim eventually of becoming profitable. Indeed, many start-up companies are in exactly this position, and new commerce might be stultified if the legislation required the directors to stop trading at the first sign of trouble (see the court’s comments in Re Hawkes Hill Publishing Co Ltd [2007] BCC 937). Indeed, the courts have accepted that even where a company had been cash flow insolvent for most of its history, the directors might still reach a bona fide conclusion on the facts available that it would return to profit over time (see Re Langreen Limited [2011] 10  WLUK  626). The judgment in this case contains useful review of the previous case law. However, the directors of a company which continues to trade whilst ‘insolvent’ will inevitably be at greater risk of personal liability should the company not survive. Additionally, there is in practice a significant overlap between the wrongful trading test and the criteria for disqualification – if it is established in disqualification proceedings that a director continued to trade beyond the ‘critical date’ they may well be held unfit to be concerned in the management of a company (see the court’s comments in Secretary of State for Trade and Industry v Gash [1997] 2 BCLC 341). A  particular concern for the board must therefore be to satisfy itself that, if the company continues to trade, there is at least a reasonable prospect of it avoiding 186

Position of directors 6.5 insolvent liquidation. If, at any stage, the point is reached when the board can no longer reasonably conclude, after a careful analysis of the facts and after proper advice, that there remains a ‘reasonable prospect’ of this, the board must ensure that they take every step with a view to minimising the potential loss to creditors. This is discussed further in Section 6.5.5. The courts in the above cases made it clear that directors’ decisions need to be reviewed in the context of what the directors knew or ought to have known at this time, not with the benefit of hindsight. However, it will be harder for directors to demonstrate their thinking without contemporaneous records. This is discussed further in Section 6.5.5.

6.5.2  What should the directors do? Unless or until the financial difficulties are resolved, the directors will need to: •

Ensure that they have accurate, comprehensive and regularly updated financial and trading information and forecasts to enable them properly to monitor the company’s position and to form the basis for their decision making.

• Take advice from a professional. If the company’s own systems cannot reliably provide the information and forecasts the directors need, urgent external support from an accountancy firm will be required. In addition, the directors should seek independent external professional advice from corporate recovery specialists if they are concerned that formal insolvency is a significant risk. • Hold regular board meetings to consider the above, to discuss the progress of any steps already being taken to improve the company’s position and to agree appropriate actions. The board will need, among other things, continuously to consider whether continuing trading or other significant actions will be in the best interests of creditors. It must review and if necessary revise any earlier decisions as further developments occur. The directors and their advisers should also therefore keep written minutes of each meeting and copies of the information and advice before the meeting since this will be evidence, if needed later, that the board considered the correct issues, was properly advised and acted appropriately. The minutes of each meeting of the directors will therefore need to be reasonably detailed, describing the reasons behind any decision, and the facts upon which they are based. The courts have been supportive of directors who have properly followed these steps – see for example Singer and another v Beckett and others [2007] 2 BCLC 287 (the ‘Continental Assurance’ case), the facts of which are set out in the box below.

Singer and another v Beckett and others [2007] 2 BCLC 287 Continental was a small insurance company. It had a full-time managing director and a part-time finance director. It also had six non-executive directors, some of whom represented major investors and others who had been invited to join the board due to their general expertise. In June 1991, the 1990 accounts were put before the board. Instead of the expected profit, the executive directors reported a considerable loss, reflecting 187

6.5  Position of directors unexpectedly high claims. The board instructed the finance director to prepare a solvency statement and forecast, to be verified by the auditors. At a board meeting on 19 July, the board carefully considered the information then before it and concluded Continental was still solvent and met its DTI solvency margin. The board also considered that, even if it could not attract the further capital it would need to secure its medium- to long-term future, an outside purchaser could still be found. In the shorter term, the forecasts showed that on current trading, Continental ought to make a small profit, and it was felt that it had now withdrawn from particularly unsatisfactory lines of business. For the rest of the year, the directors met frequently. They attempted to secure fresh capital from existing investors and to find a purchaser. In November, Continental reported to the DTI that its net asset position had fallen below its solvency margin, but the DTI allowed it to continue to trade whilst it produced a plan to rectify this. Finally, however, it was resolved that the company was no longer solvent, and it was placed into liquidation in March 1992. The directors had taken care to minute all of their meetings and other discussions. The liquidator brought a wrongful trading action against Continental’s directors. He chose 19 July 1991 as the critical date, arguing that the accounts that were before that meeting were wrong, as inappropriate accounting policies had been followed. The finance director settled, but other directors contested the action. The key issues were: (1) whether correct accounts would have shown Continental to be insolvent at the critical date; (2) whether the directors should have known that the accounting policies were inappropriate; and (3) whether the directors should have concluded, if appropriate policies had been applied, that Continental was insolvent. The court found in favour of the directors. It held that it would have imposed an unrealistically high burden on them to expect them all to have had a full understanding of the accounting policies behind the management accounts. Once they discovered that the company was in difficulty, they had instructed the finance director and auditors to investigate and report. When advised that Continental was solvent, they had still considered that advice with care, and had questioned the auditors and finance director at length before making their decision to trade on. It was reasonable for the other directors to rely on the advice given to them by the finance director in these circumstances. One of the directors’ reasons for continuing to trade was that they believed the business could be sold. On the evidence the directors were not at fault for assuming that there was a reasonable prospect of this.

6.5.3  Can a director resign? Resigning will not exempt a director from liability for wrongful trading up to the time of resignation. It might even exacerbate the risk of a finding of wrongful trading, since it is unlikely to fulfil the obligation to take ‘every step with a view to minimising the potential loss to the company’s creditors’. There are circumstances where it might be the only option, for example, for a director on a divided board who, having done their best to put forward their case for action, is overruled by the majority. It is also possible that conflicts of interest, such as in the context of a proposed refinancing, 188

Position of directors 6.5 might make it difficult for an individual director representing particular interests to remain on the board.

6.5.4  Customer deposits Where the company’s business involves taking deposit monies from customers, the directors should ideally ensure that these monies are separated from the company’s own monies. It is possible to achieve this by taking steps to ensure that monies so received will be held on trust for the customers concerned until the goods or services in respect of which the deposits had been paid had actually been supplied (Re Kayford Ltd [1975] 1 WLR 279). In this case, it is prudent: •

to prepare a written trust deed, expressly declaring the trust and providing as to how the trust monies are to be administered;

•

to place the trust monies concerned into a separate bank account; and

•

to obtain the consent of any lender who holds security over the company’s assets.

In reality, this method may not be practicable for many companies which use customer deposits as part of their day-to-day working capital. Directors would, of course, be ill-advised to continue to accept and use deposits if they considered that the company may already have reached the critical date. However, they might be justified in doing so where they properly believed that this was in the best interests of all creditors and the company retained a reasonable prospect of avoiding insolvent liquidation. In Re Uno plc: Secretary of State for Trade and Industry v Gill [2006] BCC 725 the Secretary of State argued (in disqualification proceedings) that a director’s conduct still showed a serious lack of probity if the company had continued to accept deposits or advance payments in circumstances where there was no certainty that it could meet the customer’s order, notwithstanding that the company had not yet reached the critical date. However, this argument was rejected by the court in that case.

6.5.5  Continued trading beyond the critical date 6.5.5.1  General considerations In many cases, where the directors consider that the critical date may have occurred, they will need to place the company into a formal insolvency process to avoid further losses to creditors. However, in some cases, continued trading might still be in creditors’ best interests. The directors might believe that keeping the company going for a short time longer will enable them to sell the business as a going concern and at a higher price than an insolvency officeholder would achieve. The directors will, however, need to take every step to minimise potential losses to creditors during any period of continued trading (see Section 6.4.2.3). At the most cautious level, this would mean that they need to ensure that no new creditors are created, that the net liabilities to existing creditors are not increased and that assets (including cash) which would otherwise be available on a liquidation are retained. This may make continued trading more or less impossible, at least without the support of other interested parties. The directors might be able to do little more than 189

6.5  Position of directors selling existing stock for at least the price (net of costs) which a liquidator would achieve. In appropriate circumstances, however, it might be possible to continue trading on a ‘ring fenced’ basis. Assets and liabilities which exist at the critical date would, in effect, be left untouched. The further trading must be funded from some source other than the existing assets. This might consist of income from the further trading itself, but this could be difficult to achieve in practice. Alternatively, a third party might provide the necessary funds, although these funds cannot be provided on terms which create an obligation for the company to repay that third party in competition with existing creditors. Where the beneficiary of the continued trading is a secured creditor, they may be prepared to agree in advance that an appropriate portion of their enhanced recoveries will be made available to unsecured creditors who suffer loss as a result of the continued trading.

6.5.5.2 Pre-packs Where they are preparing for a pre-packaged sale, the directors will know in advance that a formal insolvency process is inevitable. Directors would be wise, therefore, to treat the company as having passed the critical date once it is clear that the pre-pack will go ahead. The parties who will benefit from the pre-pack, who may include a number of the company’s lenders or other stakeholders, will almost certainly wish any trading company to continue to trade during the lead-up to a pre-pack. The directors may therefore wish them to agree to put in place one of the measures discussed in Section 6.5.5.1 to protect creditors.

6.5.6  Insurance and indemnities In practice, directors of many companies will have the benefit of directors and officers (‘D&O’) insurance. This may well cover the cost of defending some of the proceedings listed in Section 6.4, and may indeed also cover the cost of a compensatory award. Nonetheless, it should not be relied upon to do so. Insurance will also generally be subject to an aggregate limit of liability for all claims (including the legal cost of defending such claims). D&O  insurance also commonly operates on a ‘claims made’ basis, ie  it will be necessary to have cover in place at the time any claim is made against the director, not just at the time the events which gave rise to the claim occurred. The directors also therefore need to consider buying ‘run off’ cover prior to any formal insolvency, so that they will still have the necessary cover in place. Sometimes a director, for example, where they have been appointed by a particular shareholder, will be able to obtain an indemnity from a third party for all claims which they may face as a result. The terms of this will be a matter for negotiation. Regardless of other factors, insurance and indemnities can provide financial cover only. They cannot benefit a director should an order for disqualification or criminal conviction result, or compensate harm to their reputation. 190

Position of directors 6.6

6.6  ADDITIONAL ISSUES FOR PUBLIC COMPANIES 6.6.1  Serious loss of capital Where the net assets of a ‘public company’ fall to half, or less, of the amount of the company’s called-up share capital, the directors of the company must, within four weeks of learning of that fact, call a general meeting of the company (to be held within eight weeks) at which to consider whether any, and if so what, measures should be taken to deal with the situation (s  656  CA  2006). This applies to any company whose name ends in ‘plc’ or ‘public limited company’ – not merely to publicly quoted companies. If a meeting is not held within the time limits, the directors responsible for failing to call a meeting may be fined. ‘Net assets’ for these purposes are the aggregate of a company’s assets less the aggregate of its liabilities (including provisions for contingent and future liabilities and losses). A  company’s ‘called-up share capital’ is the amount paid up on its issued share capital, or called but not yet paid, and any further amount payable on a specified future date (whether under the articles, the terms of allotment or any other arrangements for payment for the shares). It is not clear whether a premium paid (or payable) to the company should be included. It would be safer to assume that it should not.

6.6.2  Stock exchange announcements Where a company is listed, there is an obligation under the Listing Rules of the Financial Conduct Authority to notify the Company Announcements Office of the London Stock Exchange without delay of ‘all relevant information’ not in the public domain concerning a change: •

in the company’s financial condition;

•

in the performance of its business; or

•

in its expectation as to its performance which (in any case) if made public would be likely to lead to substantial movement in the price of its listed securities.

A  change in the company’s financial condition leading it to consider any form of insolvency procedure, or requiring it to enter into negotiations with its lenders, or to call a meeting under s 656 CA 2006 is likely, once news reaches the outside world, to lead to substantial movements in its share price. The company need not make an announcement in respect of impending developments, or matters in the course of negotiation, and it may give information on a confidential basis to certain categories of people, including its advisers and those with whom it is negotiating. But if at any time confidentiality is, or is likely to be breached, a warning announcement must be made. Once negotiations extend beyond a relatively limited group of creditors, it is unlikely that confidentiality will be maintained. The UK  Listing Authority is likely, in that event, to suspend listing of the company’s shares. A fuller discussion of these issues is beyond the scope of this book. However, it will be important for directors of a listed company to take proper advice here. The fact that it may be in the better interests of the company’s creditors for the company not to make an announcement is irrelevant for these purposes. 191

6.7  Position of directors

6.7  THE DIRECTORS’ ROLE IN A FORMAL INSOLVENCY PROCESS 6.7.1  What is the effect on the directors’ powers? 6.7.1.1 Liquidation In a voluntary liquidation, the powers of the directors cease once the liquidator is appointed, except in so far as the liquidator or the company in general meeting (in the case of an MVL), or the liquidation committee (in the case of a CVL) sanctions their continuance (ss 91(2) and 103 IA 1986, respectively). The liquidator would normally be appointed at the same time as the members’ resolution is passed. However, if they are not, s  114  IA  1986 provides that the directors’ powers can only be exercised with the sanction of the court during the intervening period, except: •

as far as may be necessary (in the case of a CVL) to seek a nomination of a liquidator by the creditors and prepare a statement of affairs; and

•

to dispose of perishable goods, or other goods whose value is likely to diminish if not immediately disposed of, and to do such other things as are necessary to protect the company’s assets.

The legislation does not specifically address the powers of directors following a winding-up order, but it has been generally accepted that their powers come to an end (see, for example, Re Union Accident Insurance Co Ltd [1972] 1 WLR 640 at 642). The liquidator will again take control of the company’s affairs, and exercise their own powers to progress the liquidation.

6.7.1.2 Administration When the company is in administration, the directors remain in place unless or until they are removed. However, neither the company nor its directors are entitled to exercise any management powers without the consent of the administrator. Here, a ‘management power’ means a power which could be exercised so as to interfere with the exercise of the administrator’s powers (para  64 Sch B1  IA  1986). In practice, administrators will generally lay down guidelines for any continuing involvement of the directors in managing the company’s business. An administrator has the power to remove and appoint directors, if necessary (see Chapter 4).

6.7.1.3 Receivership When an administrative receiver is appointed, they assume the power, in place of the board, to carry on the business and to realise the company’s assets. The directors are left with little to manage, but their statutory obligations as directors continue, and they remain entitled to exercise the company’s powers to the extent that the administrative receiver does not wish to, and to the extent that such exercise will not interfere with their dealing with the assets under their control. The directors, for example, may take steps to put the company into liquidation where they think this is advisable. 192

Position of directors 6.7 The directors also retain authority to institute, on behalf of the company, proceedings against the administrative receiver and their appointor, if appropriate (eg to challenge the validity of the appointment). In other types of receivership, the receiver will assume the power to manage and realise the assets of which they have been appointed, but the directors will otherwise retain their normal powers.

6.7.1.4 CVA The directors remain in office and retain their powers both whilst the arrangement is being proposed, and after it is adopted. They will, however, be subject to the supervision of the nominee/supervisor to ensure that the arrangement is properly implemented.

6.7.2  What duties will the directors have? In a liquidation, administration or administrative receivership, the directors will have a number of specific duties. Some of these duties extend not just to individuals who are directors of the company as at the date the company enters into the insolvency process, but to individuals who have been directors and to other ‘relevant persons’. For these purposes, a relevant person will include: •

a person who is or has been an officer of the company; and

•

a person who, during the period of one year ending with the date of the formal insolvency process, took part in the formation of the company, or was employed by the company, or was an officer or employee of a company which is or has been an officer of the company.

These specific duties are as follows: •

A relevant person must provide a statement of affairs where required by the insolvency officeholder. This is discussed further in Section 6.7.3.

•

A relevant person must co-operate with the officeholder by providing such information concerning the company and its promotion, formation, business, dealings, affairs or property as the officeholder may reasonably require. They must also attend on the officeholder at such times as the officeholder may reasonably require (s 235 IA 1986). This duty applies notwithstanding that the information provided may be used against the person concerned in subsequent disqualification proceedings. Indeed, an insolvency officeholder’s normal practice will be to require individuals on whose conduct they will be required to report to the Secretary of State (see Section 6.4.7.4) to complete a director’s questionnaire shortly after their appointment.

The court has made it clear that a director’s fiduciary duties survive the company’s entry into administration or liquidation (Re System Building Services Group Limited [2020] EWHC 54 (Ch)). In addition, even where the directors’ management powers have effectively ceased, their statutory duties under the Companies Acts to prepare annual accounts and lay them before a general meeting and to make filings with the Registrar of Companies remain. Strictly speaking, the directors could still be fined for non-compliance, 193

6.7  Position of directors although in practice, the Registrar does not require the further filing of accounts once they become aware of a liquidation or administration. Best practice is probably for the insolvency officeholder still to make sufficient information available to the directors to allow them to compile statutory accounts, although the officeholder may be unprepared to do this where the insolvency process in question is likely soon to lead to the end of the company’s life.

6.7.3  Statement of affairs Shortly after (or possibly just before) the company enters into formal insolvency, the directors are likely to be required to prepare a statement of affairs. This requirement may extend not only to individuals who remain directors as at the date of the formal insolvency but also to past directors. The prescribed form and content of the statement of affairs will differ according to the insolvency process involved, but essentially it will need to give details of: •

the company’s assets, debts and liabilities;

•

the names and addresses of the company’s creditors; and

•

the security held by each creditor and the date on which that security was granted.

A statement of affairs (and any statement of concurrence) will need to be verified by statement of truth.

6.7.3.1 Liquidation In a creditors’ voluntary liquidation, the directors are required to prepare a statement of affairs, verified by some or all of the directors, to be sent to the company’s creditors within 7 days of the date when the company passes its resolution for voluntary winding up (s  99  IA  1986). However, under r 6.14(7)  IR  2016 the directors are required to deliver a copy of the statement of affairs to the creditors not later than the business day before the date set for the creditors’ decision on the nomination of a liquidator. Where the creditors’ decision is to be taken immediately after the members’ meeting, the statement of affairs will therefore need to be prepared before the liquidation. In a compulsory liquidation, the Official Receiver may require the directors to submit a statement of affairs within 21 days of the date on which the Official Receiver gives them notice, although this time limit may be extended by the Official Receiver or, failing that, the court (s 131 IA 1986).

6.7.3.2 Administration Here, the legislation is fairly comprehensive as to what is required. As soon as is reasonably practicable after the administrator’s appointment, the administrator may require one or more relevant persons (see Section 6.7.2) to provide a statement of affairs (para 47 Sch B1 IA 1986). Under para 48 Sch B1 IA 1986, a person required to submit a statement of affairs must do so within 11 days beginning with the day on which they receive notice to do so. However, the administrator may (and frequently 194

Position of directors 6.7 does) agree to extend this period. Indeed they can even revoke the requirement to supply a statement of affairs completely. The administrator may also require any other relevant person to submit a statement of concurrence, stating that they concur with the statement of affairs. However, the statement of concurrence may be qualified if the maker does not agree with the person making the statement of affairs, considers the statement of affairs to be erroneous, or does not have the direct knowledge necessary to concur. The statement of concurrence must be submitted within five business days beginning with the day on which the maker receives the statement of affairs, although again the administrator can agree to extend this (r 3.31 IR 2016).

6.7.3.3  Administrative receivership The legislation here is similar in substance to that described in Section 6.7.3.2. When an administrative receiver is appointed, they must forthwith require one or more relevant persons (see Section 6.7.2) to submit a statement of affairs within 21 days beginning with the day on which they receive notice to do so. Again, this period can be extended or the requirement revoked (s 47 IA 1986). The receiver can require a statement of concurrence from another relevant person (r 4.8 IR 2016).

195

Chapter 7

Standalone moratorium

7.1 INTRODUCTION The standalone moratorium found in Part A1  IA  1986, and which is referred to throughout this book as the ‘Part A1 Moratorium’, is a relatively new addition to English insolvency law. It was one of the new measures introduced by CIGA 2020 with the aim of assisting companies during the Covid-19 pandemic. The intention behind any moratorium for distressed companies is to provide the company with breathing space and the stability to allow its rescue by limiting the ability of creditors to enforce their debt or security. Moratoria have been implemented in English insolvency law with a view to achieving this aim prior to CIGA 2020. For example, Chapter  4 describes the interim moratorium which applies once notices of intention to appoint administrators have been filed at court and the ongoing moratorium which applies once the company has entered administration. There was also once an ability for a ‘small’ company to seek a moratorium when proposing a CVA, although this little-used process was abolished at the same time that the Part A1 Moratorium was introduced. However, unlike the moratoria that pre-date CIGA  2020, the Part A1 Moratorium is not connected with any single insolvency procedure or restructuring tool. It is designed to be a ‘debtor in possession’ procedure where, like Chapter  11 of the US  Bankruptcy Code, the company’s directors continue to manage the company rather than be displaced by an insolvency officeholder, as is the case with administration.

7.2  WHICH COMPANIES ARE ELIGIBLE FOR A MORATORIUM? 7.2.1  Eligibility for the Part A1 Moratorium The moratorium is available to a company if: •

in the view of the company’s directors, the company is, or is likely to become, unable to pay its debts as they fall due;

•

an insolvency practitioner proposed to act as the ‘monitor’ forms the view that it is likely that a moratorium would result in the company being rescued as a going concern; and

•

the company is an ‘eligible company’, ie not one of the types of companies excluded by Sch ZA1 IA 1986. 196

Standalone moratorium 7.3 The stipulation that it is the company being rescued as a going concern and not just the business (cf Section 4.2.2) would appear to rule out a moratorium being used as a precursor to a restructuring using a pre-packaged administration.

7.2.2  What types of company are excluded? The types of companies listed in Sch ZA1 IA 1986 and which are therefore ineligible for a moratorium include: •

companies that are, or in the past 12 months have been, subject to a moratorium or insolvency proceedings;

•

various types of financial institutions including insurance companies, banks, electronic money institutions, recognised investment exchanges, clearing houses and other providers of financial infrastructure;

•

securitisation companies;

•

parties to capital market arrangements; and

•

public-private partnership project companies.

The exclusion of parties to a capital market arrangement is notable as this excludes most companies that have issued or guaranteed bonds with a debt of £10 million or more. The effect is to severely limit the applicability of the moratorium to very large companies as these are likely to have capital structures involving bonds. Private equity owned portfolio companies may also find that they are ineligible for the moratorium if private equity fund makes its investment through loan notes which are listed in order to benefit from the ‘quoted Eurobond exemption’ to withholding tax.

7.2.3  Other entities English partnerships are discussed in Chapter 1 and overseas companies are discussed in Chapter 12. Charitable incorporated organisations are eligible for a moratorium unless they are private registered providers of social housing in England or registered as social landlords in Wales under Part 1 of the Housing Act 1996.

7.3  HOW CAN A COMPANY OBTAIN A MORATORIUM? 7.3.1  The two alternative routes Table 7.1 shows the Part A1 Moratorium process in flowchart form. There are two alternative routes for obtaining a moratorium: •

an ‘out-of-court’ route available for English companies which do not have an outstanding winding-up petition against them; or

•

an application to court for a moratorium order available for English companies which do have an outstanding winding-up petition.

Once the company has obtained a moratorium, the moratorium process will be the same regardless of the route by which the moratorium was obtained. 197

7.3  Standalone moratorium Table 7.1 – The moratorium process

7.3.2  The ‘out-of-court’ route Where the ‘out-of-court’ route’ is available, it allows a company to obtain a moratorium quickly by filing documents at court without the need for a court hearing. The company is required to file notices from the directors and the proposed monitor 198

Standalone moratorium 7.3 (s A6 IA 1986). Full details on the contents of the notices is set out in rr 1A.4 and 1A.5 IR 2016, but an overview is given here. The directors’ notice must state: •

that the directors wish to obtain a moratorium; and

•

that, in the directors’ view, the company is, or is likely to become unable to pay its debts,

The proposed monitor’s statement must state: •

that they are a qualified person (ie they are qualified as and licensed to be an insolvency practitioner);

•

the proposed monitor’s relevant recognised professional body which the source of their authorisation and their IP number;

•

that they consent to act as monitor in respect of the proposed moratorium;

•

that the company is an eligible company; and

•

that, in the proposed monitor’s view, it is likely that a moratorium for the company would result in the rescue of the company as a going concern.

Where more there is more than one proposed monitor, each proposed monitor must give a notice with the above statement. In addition, the proposed monitors’ notices must state which functions of a monitor are to be exercised jointly and which may be exercised by any or all of the proposed monitors. The notices must be filed at court within five business days of the date of the notices. Unlike an out-of-court appointment of an administrator (see Section 4.3.4.5), there is no need to file a record of the directors’ decision to obtain a moratorium, although it remains wise to ensure that the decision is properly made as a lack of a valid decision could later prove the basis of a challenge to the moratorium. The moratorium will take effect from the time and date on which the automated email acknowledging the submission of the above documents to the court’s online CEfiling system is received (see s A7 IA 1986 and para 11 of the Temporary Insolvency Practice Direction Supporting the Insolvency Practice Direction [2021] BCC 877).

7.3.3  The court route An application to the court for a moratorium order will need to be accompanied by those same notices from the directors and of the proposed monitor(s) as were described in Section 7.3.2 for a filing by a company using the ‘out-of-court’ route (rr 1A.8 to 1A.10 IR 2016). As with all hearings concerned with the Part A1 Moratorium, it may be listed before a High Court judge or an Insolvency and Companies Court judge but not a District Judge. The court will only exercise its discretion to order a moratorium if it is satisfied that the moratorium would achieve a better result for the company’s creditors as a whole than would be likely if the company were wound up without there first being a moratorium. A moratorium granted by a court order will take effect from the time the order is made (s A7 IA 1986). 199

7.4  Standalone moratorium

7.3.4  Proposed monitor’s due diligence Before accepting an appointment as a monitor, an insolvency practitioner will need to carry out some due diligence in order to satisfy themselves that they can give the statements in their notice with their consent to act. In particular, they will need to be able to form the view that it is likely that a moratorium for the company would result in the rescue of the company as a going concern. The decision as to whether to take the appointment as monitor may need to be taken very quickly. For example, an insolvency practitioner may be approached to act as monitor following a demand for payment and threat of enforcement by a creditor – in the Corbin & King case (see Section 7.5.2) the monitors were appointed the day after the lender first made demand. Fortunately, when carrying out their pre-appointment due diligence a proposed monitor can take comfort that they are entitled to rely on information provided by the company unless they have reason to doubt its accuracy (s A35 IA 1986). They can obtain further comfort from the Insolvency Service’s guidance in Dear IP Issue No 135 which explains that: •

‘due diligence that needs to be undertaken should be proportionate to the size and circumstances of the company’;

•

‘the use of the expression “in the proposed monitor’s view” indicates that a degree of latitude is to be given to a monitor in this regard, recognising that the monitor’s assessment will most likely require the exercise of a substantial amount of commercial judgment, often under significant time pressure’; and

•

‘It is clear that Parliament did not intend the proposed monitor to conduct a full audit of the company to satisfy themselves for the purposes of a section A6(1)(e) statement.’

7.4  WHAT IS THE EFFECT OF A MORATORIUM? 7.4.1  Types of debts affected and payment holiday As has already been explained in Section 2.4.2.3, Part A1 IA 1986 draws a distinction between two categories of debt: pre-moratorium debts; and moratorium debts. Pre-moratorium debts are further sub-divided into debts which are subject to a payment holiday and debts which are not subject to a payment holiday. The debts falling into the latter sub-category will be the priority pre-moratorium debts listed in Section 2.4.2.3. The company does not have to pay the pre-moratorium debts subject to a payment holiday and indeed may be restricted from doing so (see Section 7.4.4). However, if a company does not pay: (i) its moratorium debts; and/or (ii) those pre-moratorium debts which are not subject to a payment holiday as they fall due, then the monitor may be required to terminate the moratorium. In addition, neither a CVA, a Scheme of Arrangement nor a Restructuring Plan which is proposed within 12 weeks of the end of a moratorium may compromise a moratorium debt or a priority pre-moratorium debt without the consent of the relevant creditor. 200

Standalone moratorium 7.4

7.4.2  Protection from insolvency proceedings The Part A1 Moratorium restricts stakeholders other than the directors from commencing insolvency proceedings in respect of the company (s A20  IA  1986). Directors can still initiate insolvency proceedings, although they are required to inform the monitor if they do so (s A24 IA 1986). Accordingly, none of the following may occur while a Part A1 Moratorium is in place: •

presentation of a winding-up petition except by the directors (other than petitions by the Secretary of State on the grounds of public interest, petitions by the Prudential Regulated Authority on the grounds that an entity it regulates is unable to pay its debts, or certain petitions by the Secretary of State or the Financial Conduct Authority in relation to Cooperative European Societies and Societas Europaea);

•

passing of a special resolution for a voluntary liquidation unless the special resolution has been recommended by the directors;

•

an order for compulsory liquidation, except where petitioned for by the directors or by one of the other persons or bodies referred to above;

•

an application for an administration order, except by the directors;

•

filing of a notice of intention to appoint administrators by the company or a qualifying floating charge holder;

•

filing of a notice to appoint administrators by a qualifying floating charge holder; and

•

appointment of an administrative receiver.

7.4.3  Protection from enforcement To provide further protection from creditor pressure, the Part A1 Moratorium also provides protection from various forms of enforcement and legal proceedings, as set out in ss A21 to A23 IA 1986. These protections are summarised in the first column of Table 7.2 but are subject to the exceptions described in the second column of that table.

7.4.4  Restrictions on the company during a moratorium In a similar way to that already described for liquidation and administration, a moratorium is required to be publicised by the company by including a statement that a moratorium is in effect and the name of the monitor on the company’s website and its business documents, which include the company’s invoices, orders for goods and service and business letters (s A19 IA 1986). There are also a number of restrictions imposed on a company during a moratorium, which are set out in ss A25 to A32 IA 1986. These restrictions are summarised in the first column of Table 7.3, but are subject to the exceptions described in the second column of that table. 201

7.4  Standalone moratorium Table 7.2 – Protections afforded by the moratorium Restricted enforcement or legal proceeding

Exception

Forfeiture by peaceable re-entry by a landlord

Permitted with the court’s permission.

Any steps to enforce security over company’s property

Permitted if: •

enforcement of a ‘collateral security charge’ within the meaning given to the term by the Financial Markets and Insolvency (Settlement Finality) Regulation 1999 (SI 1999/2979);

•

enforcement of a ‘financial collateral arrangement’ within the meaning given to the term by the Financial Collateral Arrangements (No 2) Regulations 2003 (SI 2003/3226); or

•

with the court’s permission (but permission cannot be sought to crystallise a floating charge).

If the security was granted during the moratorium enforcement will also require the monitor’s consent. Repossession of goods in the company’s possession under a hirepurchase agreement

Permitted with the court’s permission.

Institution of, carrying out or continuing a legal process (including legal proceedings, execution, distress or diligence)

Permitted if:

Crystallisation of a floating charge or exercise of a right in security to impose restrictions on the disposal of the company’s property

•

employment tribunal proceedings or related legal proceedings;

•

any other proceedings between an employer and a worker; or

•

with the court’s permission

Restriction does not apply to a floating charge in: •

a ‘collateral security charge’ within the meaning given to the term by the Financial Markets and Insolvency (Settlement Finality) Regulation 1999 (SI 1999/2979);

•

a ‘financial collateral arrangement’ within the meaning given to the term by the Financial Collateral Arrangements (No 2) Regulations 2003 (SI 2003/3226);

•

a ‘market charge’ within the meaning given to the term by Part 7 Companies Act 1989; and

•

a ‘system-charge’ within the meaning given to the term by the Financial Markets and Insolvency Regulations 1996 (SI 1996/1469).

A  transaction in breach of the requirement to publicise the moratorium or of the restrictions on the company summarised in in the above table is not void, but the company and any officer who authorised the transaction without reasonable excuse commits an offence. During a moratorium, a company may apply to the court for permission to dispose of property subject to a floating charge or property in the company’s possession under a hire purchase agreement. The court may only give its permission if it considers that this will support the rescue of the company as a going concern. 202

Standalone moratorium 7.4 Table 7.3 – Restrictions on imposed the company during a moratorium Restriction on company during moratorium

Exception

Obtaining credit of £500 or more

Permitted if relevant creditor has been informed that moratorium is in force in relation to the company.

Granting security

Permitted with monitor’s consent (but note that if the security contains a ‘financial collateral arrangement’, ‘market charge’, ‘system-charge’ or ‘collateral security’ as described below it will not be permitted even with monitor’s consent).

Entering into a ‘market contract’ within the meaning given to the term by Part 7 Companies Act 1989

None.

Entering into a ‘financial collateral arrangement’ within the meaning given to the term by the Financial Collateral Arrangements (No 2) Regulations 2003 (SI 2003/3226)

None.

Granting a ‘market charge’ within the meaning given to the term by Part 7 Companies Act 1989

None.

Granting a ‘system-charge’ within the meaning given to the term by the Financial Markets and Insolvency Regulations 1996 (SI 1996/1469)

None.

Providing any ‘collateral security’ within the meaning given to the term by the Financial Markets and Insolvency (Settlement Finality) Regulations 1999 (SI 1999/2979)

None.

Giving a ‘transfer order’ within the meaning given to the term by the Financial Markets and Insolvency (Settlement Finality) Regulations 1999 (SI 1999/2979)

None.

Payments of pre-moratorium debts which are subject to a payment holiday and which are more than the greater of: (i) £5,000; or (ii) 1% of the value of debts and other liabilities owed by the company at the start of the moratorium (to the extent such liabilities can be ascertained)

Permitted if:

Disposal of company’s property

Permitted if:

Disposal of goods in company’s possession under a hire-purchase agreement

•

monitor consents;

•

pursuant to a court order; or

•

discharging secured sums or obligations under a hire purchase agreement where the court has permitted disposal of charged property free of security interests or disposal of hire purchase property.

•

disposal is in the ordinary way of the company’s business;

•

monitor consents; or

•

pursuant to a court order.

Permitted:

203

•

with the permission of the court; or

•

pursuant to the terms of the hirepurchase agreement.

7.5  Standalone moratorium Except in relation to a floating charge, where the company has been given permission to dispose of the property it must apply the net proceeds of the disposal plus any additional amount that the court determines is required to top-up the net disposal proceeds to the property’s open market value towards discharging the secured sums or the amount owed under the hire purchase agreement (as relevant). Where the company has been given permission to dispose of property subject to a floating charge the floating charge holder will retain a security interest in the property which directly or indirectly represents the property disposed of.

7.4.5  The effect on supply contracts The provisions of the IA 1986 which protect contracts for the supply of goods and services in an administration are discussed in detail in Section 4.9. The provisions of s 233B IA 1986 apply equally where a Part 1A Moratorium comes into force in relation to a company, save that for the purposes of s 233B(5) IA 1986 it is the directors of the company rather than the administrator who would need to consent to the termination of a contract. However, the provisions of s 233 and s 233A IA do not apply to a Part 1A Moratorium.

7.5  THE MONITOR 7.5.1  What is the role of the monitor 7.5.1.1  Statutory requirements As the name suggests, the monitor’s intended role is to carry out an oversight function. In particular, the monitor must monitor the company’s affairs in order to decide whether it remains likely that the moratorium will result in the rescue of the company as a going concern (IA 1986, s A35). In contrast to a liquidator or an administrator a monitor is not an agent of the company and has no power to manage the company or deal with its assets. The monitor also plays a role in communicating the commencement, extensions and termination of the moratorium to: •

the registrar of companies (Companies House has prepared standard forms for this purpose);

•

every creditor of the company of whose claim the monitor is aware of;

•

the Pensions Regulator where the company is an ‘employer’ in respect of an occupational pension scheme which is not a money purchase scheme; and

•

the Pension Protection Fund (the ‘PPF’) where the company is an ‘employer’ in respect of a pension scheme which is an eligible scheme within the meaning of s 126 Pensions Act 2004 (and so is eligible for protection by the PPF),

(see s A8 IA 1986). A monitor must be a licensed insolvency practitioner and so will be required to comply with the Insolvency Code of Ethics and the applicable regulations of their recognised professional body. A monitor will also be an officer of the court (s A34 IA 1986) and so will be subject to the obligation to act with integrity and without conflicts. 204

Standalone moratorium 7.5

7.5.1.2  Insolvency Service guidance The Insolvency Service has produced its own comprehensive guidance as to the role and functions of the monitor (see www.gov.uk/government/publications/insolvencyact-1986-part-a1-moratorium-guidance-for-monitors). In addition to re-stating the statutory requirements set out above, this guidance adds that, among other things: •

Prior to the moratorium the prospective monitor will need to engage with the directors and seek information about the company’s assets, liabilities and business so that they are able to assess the company’s financial position, prospects and eligibility for a moratorium. This will be a good opportunity for the prospective monitor to obtain a list of the company’s creditors, the amounts owed to them, details of any security held together with their contact details (postal and email addresses), which the monitor will need when appointed. The extent of this pre-appointment work will be for the insolvency practitioner using their professional experience and judgement to decide on and should be proportionate to the size and complexity of the company.

•

The monitor must support the integrity of the moratorium process and ensure creditor interests are protected. To fulfil this role the legislation therefore enables the monitor to require the directors to provide any information the monitor requires for the purpose of carrying out their functions under the moratorium. This is necessary to enable the monitor to assess the company’s affairs in the short timescales available. The monitor should exercise their professional judgement to satisfy themselves of the accuracy of the information provided and is able to require the directors provide further information.

•

It is important that directors have regard to the interests of employees and the government believes that all good employers will inform their employees of entry into a moratorium. To safeguard employees, when in receipt of notification from the directors that a moratorium has come into force, the monitor should ensure that the directors have informed employees of the effect of the moratorium, its initial length, its effect on their wages, salary and employment rights.

While this chapter will not discuss this guidance in any greater detail, it is something which any potential monitor should ensure that they have read in full.

7.5.2  Powers of the monitor As the management of the company remains in the hands of the directors, the powers of the monitor are limited compared to those of a liquidator or an administrator. The main power of the monitor is their ability, and indeed obligation, to terminate the moratorium if they think any of the circumstances set out in s A38 IA 1986 has occurred (see Section 7.6.6). The nature of this obligation was a central question in the first reported decision of an English court in relation to the Part A1 Moratorium, Minor Hotel Group MEA DMCC v Dymant and Harding (as joint monitors of Corbin & King Holdings Limited) [2022] EWHC 340 (Ch) (the ‘Corbin & King case’), the facts of which are set out in the box below. As the Corbin & King case made clear, the use of the word ‘thinks’ should be interpreted in the same way as it has been in relation to an administrator choosing which objective to pursue (see Section 4.2.1). As a Part A1 Moratorium is likely to 205

7.5  Standalone moratorium be a particularly fast-moving process, however, a prudent monitor may well wish to keep a daily record of their thinking and of their reasons for so thinking. Minor Hotel Group MEA DMCC v Dymant [2022] EWHC 340 (Ch) The Corbin & King group operated restaurants. Its ultimate parent company was Corbin & King Ltd (‘Topco’). Various intermediate holding, operating and assetowning companies (the ‘Opcos’) sat beneath Topco. The majority shareholder in Topco was MI Squared Ltd (‘MI Squared’). Its minority shareholders included the group’s founders, Christopher Corbin and Jeremy King. An associate company of MI Squared, Minor Hotel Group MEA DMCC (‘MHG’), had advanced two loans to Topco. Topco’s obligations were guaranteed by each Opco. Topco and each Opco had also granted debenture security to MHG. Topco failed to repay the first loan when required to do so, which constituted an event of default under the other. MHG served demand on Topco on 19 January 2022. As soon as MHG served demand, two entities collectively known as ‘Knighthead’ made an offer to MI  Squared and MHG’s parent, Minor International plc (‘Minor’), to acquire its direct and indirect interests in Topco and the Opcos for a sum equal to the total amount of the loans. Minor rejected this. On 20 January the directors appointed monitors of the Opcos. The following day MHG made demand on each Opco under its guarantee. On 25  January it appointed administrators to Topco. On 26  January, Knighthead made an offer to the administrators to purchase Topco’s direct and indirect interests in the Opcos for a consideration equal to Topco’s total indebtedness. Knighthead indicated that it was prepared to work very quickly to produce a binding and unconditional offer capable of immediate acceptance. MHG applied to court to terminate the moratoria on the grounds that, because the Opcos’ guarantee debts were pre-moratorium debts without a payment holiday which the Opcos were unable to pay, the monitors’ failure to terminate pursuant to s A38 IA 1986 had unfairly harmed its interests. On 3 February, just before the hearing, Knighthead offered to refinance the whole MHG debt pending a sale by the administrators of Topco. The court held that a company is able to pay a presently due, pre-moratorium finance obligation if it has the immediate prospect of receiving third party funds or owns assets capable of immediate realisation. What constitutes an ‘immediate’ receipt or realisation is a matter for commercial judgment by the monitor. However, the fact that the period within which debts must be reasonably likely to be paid in order to be disregarded has been set at five business days gave an indication of the timescale against which the monitor’s assessment must be made. In the court’s view, the monitors’ original decision to resist the order terminating the moratoria was one which no reasonable monitor applying the correct test could have reached. It was obvious that Topco’s administrators could not immediately accept Knighthead’s offer to purchase but would be bound first to conduct a marketing exercise and open sale in order to comply with their own duties. However, the revised offer of immediately available interim funding to discharge Topco’s loans and thus relieve the Opcos of their guarantee liabilities 206

Standalone moratorium 7.5 could properly cause the monitors to think that the Opcos were ‘able to pay’ the relevant debts. Finally the court considered whether, if it found that at some stage the monitors ought to have terminated the moratoria, the court should terminate them by order. In this respect the court had a discretion and needed to perform a balancing exercise. While the moratoria remained in place, MHG was prevented from exercising its rights, including its right to appoint administrators to the Opcos, but the court made it clear that relevant harm was limited to that which MHG would suffer as a creditor. As a restaurant business, the Opcos would in turn suffer harm if MHG was able to appoint administrators. The court was prepared to allow the moratoria to continue until lapse but to require the monitors to justify any extension had the loans still not been repaid by then. The monitor also controls the ability of a company to extend the moratorium by providing the statement that, in their view it is likely that the moratorium will result in the rescue of the company as a going concern which is required for an extension of the moratorium by the directors with or without the consent of the creditors or by a court order pursuant to s A13 IA 1986. The monitor is also able to permit certain transactions that the company would otherwise be restricted from carrying out during the moratorium, including: •

payments of pre-moratorium debts which are subject to a payment holiday and which are more than the greater of: (i) £5,000; or (ii) 1% of the value of debts and other liabilities owed by the company at the start of the moratorium (to the extent such liabilities can be ascertained) (s A28 IA 1986);

•

the granting of security by the company (s A 26 IA 1986); and

•

disposal of the company’s property which is not subject to a security interest and which is not in the ordinary way of the company’s business or pursuant to a court order (s A29 IA 1986).

The monitor may only give their consent if they think that the transaction will support the rescue of the company as a going concern. As already noted, the monitor may request that the directors provide them with any information that the monitor requires for the purpose of carrying out their functions as monitor as soon as practicable. The monitor has no power to compel the directors to provide such information, but the directors’ incentive to comply is the obligation of the monitor to terminate the moratorium if they are not provided with the information they need (s A36 IA 1986). Finally, the monitor may apply to the court for directions about the carrying out of their functions (s A37 IA 1986).

7.5.3  Remuneration of the monitor The remuneration and expenses of the monitor is a matter of contractual agreement between the company and the monitor. Unlike the remuneration of administrators or liquidators, the remuneration of the monitor is not subject to the approval of creditors. However, a subsequent administrator or liquidator may apply to the court within two years of the end of the moratorium to challenge a monitor’s remuneration 207

7.6  Standalone moratorium as excessive (r 1A.27 IR 2016). An administrator or liquidator could also assign the right to take this action (s 246ZD IA 1986). The remuneration and expenses of the monitor incurred during the moratorium are not subject to a payment holiday. As was explained in Section 2.4.2.1, they also benefit from ranking as a ‘moratorium debt’ in an insolvency that occurs within 12 weeks of the end of the moratorium. Payment of the monitor’s pre-moratorium remuneration is, however, subject to the payment holiday. Accordingly, it will be caught by the restriction on payments in s A28 IA 1986 if such payment is more than the greater of: (i) £5,000; or (ii) 1% of the value of debts owed by the company. The monitor could consent to the payment of their pre-moratorium remuneration though this may be difficult due to the conflict of interest (which is relevant to monitors as regulated insolvency practitioners and officers of the court) and difficulty in justifying that this will support the rescue of the company as a going concern.

7.6  WHAT IS THE DURATION OF A MORATORIUM? 7.6.1  Initial period of a moratorium A moratorium will run for an initial period of 20 business days starting on the day after the moratorium came into force (s A9 IA 1986). Further extension using the routes described below are possible provided that such extensions are completed while the moratorium is still in effect.

7.6.2  Extension without creditors’ consent After the first 15 business days of the initial period of the moratorium the directors may, without the creditors’ consent or an application to the court, extend the initial period of the moratorium by a further 20 business days (s A10 IA 1986). In order to extend the moratorium, the directors will need to file at court: •

a notice that the directors wish to extend the moratorium;

•

a statement from the directors that all moratorium debts or pre-moratorium debts without a payment holiday have been paid or otherwise discharged if they have fallen due;

•

a statement from the directors that, in their view, the company is, or is likely to become, unable to pay its pre-moratorium debts; and

•

a statement from the monitor that, in the monitor’s view, it is likely that the moratorium will result in the rescue of the company as a going concern.

The process for extending the moratorium by filing documents at court is the same regardless of whether the company obtained the initial moratorium by filing documents using the ‘out-of-court’ route or by way of a court order.

7.6.3  Extension with creditors’ consent After the first extension, the directors cannot unilaterally extend the moratorium. However, they may obtain a further extension with the consent of the creditors (s A11 IA 1986). 208

Standalone moratorium 7.6 The documents required to be filed at court for an extension of the moratorium with creditors’ consent are those required for a first extension without creditors’ consent plus a statement from the directors that creditors’ consent has been obtained and of the revised end date to which the creditors consented. Creditors’ consent is obtained using a qualifying decision procedure as defined in s  246ZE(11)  IA  1986. The possible processes are generally as outlined for an administration (see Section 4.6.5.3). However, it is not possible to extend the moratorium using the deemed consent procedure, which would normally allow a decision of the creditors to be deemed to be made unless 10% by value of creditors object. As per r 15.34 IR 2016 and s A12 IA 1986, the voting threshold for creditors’ consent to extend a moratorium is a majority by value of creditors of a premoratorium debt for which there is no payment holiday and which has not been paid or discharged. In addition, as for an administration (see Section 4.6.5.5) creditors’ consent will not be given if it is opposed by a majority in number of the creditors voting who are unconnected with the company. A creditor is unconnected unless the convenor of the decision process determines that they are connected. There may be more than one extension with creditors’ consent, but all such extensions may not in aggregate extend the moratorium to more than one year from the start of the initial moratorium period. An extension of a moratorium with creditors’ consent can be made after the first 15 business days of the initial duration of the moratorium. The moratorium is not extended to allow for the completion of the qualifying decision period and creditors’ consent must be obtained before the moratorium expires. There is a potential for creditors who together hold 10% by value of the company’s liabilities or constitute 10% of the number of the company’s creditors or are ten or more of the company’s creditors to exercise their right to call for any qualifying decision procedure instead to be made at a physical creditors’ meeting. This may disrupt the timetable for obtaining creditor’s consent and cause the moratorium to expire before the extension can be made. Accordingly, it may be prudent for the directors to start any qualifying decision procedure to consent to an extension as soon as it can.

7.6.4  Extension by court order The directors may also apply to the court for an extension (s A13 IA  1986). The documents required to be filed at court are the same as for a first extension of the moratorium by the directors without creditors’ consent or a court order plus a statement of the directors as to whether the pre-moratorium creditors have been consulted about the application, and if not, why not. This suggests that it is not strictly necessary to consult the pre-moratorium creditors. However, the interests of pre-moratorium creditors is one of two factors that the court must consider when deciding whether to order an extension. The other factor to be considered by the court is the likelihood that the extension of the moratorium will result in the rescue of the company as a going concern. There is no limit on the length of time by which the court may extend the moratorium and more than one application to the court for an extension may be made. Section A15 IA 1986 provides a separate route for the court to extend the moratorium where the court has also ordered meetings to be convened to consider a Scheme of Arrangement or a Restructuring Plan. 209

7.7  Standalone moratorium

7.6.5  Extension while a proposal for a CVA is pending If a proposal for a CVA has been made while a moratorium is in force, then the moratorium will be automatically extended until the CVA proposal is disposed of.

7.6.6  Early termination of a moratorium A  moratorium will end if a CVA takes effect, or a Scheme of Arrangement or Restructuring Plan is sanctioned by the court. A moratorium will also end early if the company enters liquidation (voluntary or compulsory) or administration or an interim moratorium pursuant to para 44 Sch B1 IA 1986 comes into effect due to the filing of a notice of intention to appoint administrators. A moratorium may also be ended by the monitor pursuant to s A38 IA 1986. Indeed, the monitor must terminate the moratorium by filing a notice to court if the monitor thinks that: •

the moratorium is no longer likely to result in the rescue of the company as a going concern;

•

the objective of rescuing the company as a going concern has been achieved;

•

by reason of a failure by the directors to comply with their obligations under s A36 IA 1986 to provide the monitor with information about the company, the monitor is unable properly to carry out the monitor’s functions; or

•

the company is unable to pay moratorium debts or pre-moratorium debts for which the company does not have a payment holiday.

Pursuant to r 1A.24 IR 2016, when considering the last bullet point the monitor must disregard any moratorium debts or pre-moratorium debts for which the company does not have a payment holiday that they have reasonable grounds for thinking are likely to be repaid or compounded to the creditor’s satisfaction within five business days’ of the monitor’s decision, or which the creditor has agreed to defer to a date later than the monitor’s decision. In the Corbin & King case, the court held that any payment which is due to be made more than five business days after the monitor’s decision should be specifically assessed by the monitors. A  commercially realistic approach should be taken to assessing inability to pay. Ability to pay includes having the ‘immediate’ prospect of receiving third party funds or realising assets. ‘Immediate’ is a matter of commercial judgment for the monitor.

7.7  CHALLENGES IN CONNECTION WITH A MORATORIUM 7.7.1  Challenges to the conduct of a monitor Section A42 IA 1986 allows a creditor, director or member of the company or any other person affected by the moratorium, to apply to the court on the grounds that an act, omission or decision of the monitor during the moratorium has ‘unfairly harmed’ the interests of the applicant. The court has the discretion to confirm, reverse or modify any act or decision of the monitor, give the monitor directions or make any such order that the court thinks 210

Standalone moratorium 7.7 fit. The court may not (at least under s A42 IA 1986) order the monitor to pay any compensation. Nevertheless, it is still conceivable that the monitor could be ordered to return any remuneration and, in any case, the monitor would be keen to avoid the reputational damage of an adverse court order. The court could potentially also exercise its inherent jurisdiction to control one of its officers. ‘Unfairly harmed’ is the same language used in para 74 Sch B1 IA 1986 in relation to challenges to an administrator’s conduct. As already noted in Section 4.7.2.1, in Re Coniston Hotel (Kent) LLP [2013] EWHC 93 (Ch), a case concerning para 74, Norris J held that unfairly harmed would: ‘ordinarily mean unequal or differential treatment to the disadvantage of the applicant (or applicant class) which cannot be justified by reference to the interests of the creditors as a whole or to achieving the objective of the administration’. It is reasonable to assume that the court would apply an equivalent interpretation to the term ‘unfairly harmed’ in the context of a moratorium. As was illustrated in the Corbin & King case, when exercising its discretion the court will carry out a balancing exercise of weighing up the harm caused to the applicant versus the harm caused to the company by allowing the application (ie  the harm caused by terminating the moratorium). The most likely challenge to a monitor is that of a creditor alleging that the monitor has failed to terminate the moratorium in accordance with s A38  IA  1986 which was the basis of challenge in the Corbin & King case. Section A42(5) expressly contemplates that the court may order the termination of a moratorium. However, a creditor faces the difficulty that the monitor need only satisfy a relatively low standard of decision making. As noted in Section 7.5.2, the monitor’s duty to terminate under s A38 IA 1986 is based on what the monitor thinks. This means the monitor has a considerable degree of latitude when making their decision. A  monitor’s decision will only be open to challenge if it was made in bad faith or was irrational such that no reasonable monitor could have reached it.

7.7.2  Challenges to the conduct of directors Pursuant to s A44 IA 1986, challenges may also be brought against the directors by a creditor or member of a company if, during a moratorium, the directors have managed the company’s affairs, business and property so as to unfairly harm the interests of creditors or members. This may be creditors or members generally or a subset of the company’s creditors or members so long as it includes at least the applicant. The directors’ conduct being challenged may be actual as well as proposed. The court has a broad discretion to make any order it sees fit. Section A44(3) IA 1986 contemplates that the potential orders the court may give include: •

regulating the directors’ management of the company’s affairs, business and property for the remainder of the moratorium;

•

requiring the directors to take or refrain from the act complained of;

•

requiring a decision of the company’s creditors to be sought using a qualifying decision procedure; and

•

terminating the moratorium. 211

Chapter 8

CVAs, Schemes of Arrangement and Restructuring Plans

8.1 INTRODUCTION Chapter 1 gave an overview of the CVA, scheme of arrangement and restructuring plan processes. This chapter considers these processes in more detail. They are similar to each other in that, among other things: •

they are all statutory procedures used to reach arrangements with creditors, and each may allow a specified majority of creditors voting in favour to impose the arrangement on a minority of dissenting creditors;

•

compared to liquidation and administration, none of these processes has detailed rules, and in particular they allow for a degree of flexibility as to how creditors will be treated – the flexibility is limited largely only by an inability to bind secured or preferential creditors without their consent (in the case of a CVA) and by creditors’ rights to object if they are being unfairly treated;

•

the directors largely or wholly retain their management powers and none of these processes gives rise in itself to the various potential sanctions against directors associated with liquidation and administration; and

•

there is no specific requirement that the company need be unable to pay its debts in order to enter into any of these processes, although access to the Restructuring Plan does require the company to have or be likely to have financial difficulties that are affecting, or will or may affect, its ability to continue business as a going concern.

Table 8.1 shows some of the main differences between these processes. The legislation in relation to a CVA is found in Part 1 IA 1986. In many cases, they will not all be viable alternatives. The CVA process was originally designed to be a low-cost option for companies in difficulty, although the inability to bind secured creditors without their consent does reduce its usefulness to some extent. The legislation in relation to the other two processes is found in Parts 26 and 26A CA 2006 respectively. For the purposes of this book the process in Part 26 CA 2006 is referred to as a ‘Scheme of Arrangement’ or ‘Scheme’ and the process in Part 26A CA  2006 is referred to as a ‘Restructuring Plan’ or ‘Plan’. Neither the Scheme nor the Plan process is a low-cost option, given the need for significant court involvement, although the UK Government’s wish remains that the costs associated with the Restructuring Plan process can be reduced sufficiently to enable it to be regularly used by mid-market companies and ideally even by small and mediumsized enterprises (SMEs). Nevertheless, there will still be eventualities where at least two, or possibly all three, of these processes are worth considering. 212

CVAs, Schemes of Arrangement and Restructuring Plans 8.1 The CVA has become a valuable tool to compromise the claims of landlords for companies with surplus rented premises. The CVA is also regularly used in football club insolvencies. In both of these cases, its usefulness derives from the fact that, although all creditors are entitled to vote on the proposal, it is possible for a CVA to treat some of those creditors differently from others. CVAs are discussed in more detail in Section 8.2. Schemes of Arrangement have frequently been used as a tool to compromise the claims of financial creditors in high-value corporate restructurings. They have also been used to compromise multiple claims against companies, for example under contracts of insurance and for asbestosis. In recent years, Schemes have frequently been used (including by a number of non-UK companies) as a means to ‘drag-along’ non-consenting lenders or bondholders in relation to votes required to amend syndicated debt facilities or bonds as part of a wider restructuring. They can compromise the rights of members (who will in most cases be shareholders) as well as those of creditors. Restructuring Plans are procedurally similar to Schemes, but are potentially a more powerful restructuring tool as they allow for a cross-class cram-down. Like Schemes, Plans have been used to restructure syndicated debt facilities and bonds. However, the increased ability to overcome opposition from dissenting creditors allows Plans to be used in a wider range of circumstances, such as for compromises of trade creditors and landlords. Schemes and Plans are discussed in more detail in Section 8.3. Table 8.1 – CVAs, Schemes of Arrangement and Restructuring Plans compared CVA

Scheme of Arrangement

Restructuring Plan

Is it a ‘formal insolvency process’?

Yes.

No.

Potentially. The company must have or expect financial difficulties. A Plan has been held to be a ‘collective insolvency procedure’.

Must a qualified insolvency practitioner be involved?

Yes – as a nominee prior to, and as a supervisor during, implementation.

No.

No.

How is the court involved?

Certain filings with the court office, but no court hearings.

At least two court hearings are required.

At least two court hearings are required.

How do creditors vote?

All creditors vote by way of a single decision procedure.

Creditors divided into classes and each class votes separately. Not all classes need vote, although classes that do not will not be bound.

Creditors divided into classes and each class votes separately. Not all classes need vote. A class with no economic interest can be bound even if not voting.

What are the voting thresholds for approval?

>75% by value of creditors must vote in favour but not approved if >50% by value of unconnected creditors reject it.

At least 75% by value and a majority in number of each class must vote in favour.

At least 75% by value of a class. There is no numerosity threshold. Not all classes must vote in favour as a dissenting class can be crammed down.

213

8.2  CVAs, Schemes of Arrangement and Restructuring Plans Can it bind secured creditors?

Secured creditors cannot be bound without their consent.

Can be used to bind secured creditors falling into the class(es) voting.

Can be used to bind secured creditors falling into the class(es) voting.

What is the effect on members?

Cannot be used to alter members’ rights.

Can be used to alter members’ as well as creditors’ rights.

Can be used to alter members’ as well as creditors’ rights.

How are ‘fairness’ issues and procedural defects addressed?

Creditors must initiate their own ‘unfair prejudice’ or ‘material irregularity’ challenge following approval.

The company must convince the court at a sanction hearing that the Scheme is fair and that the procedure was correctly carried out.

The company must convince the court at a sanction hearing that the Plan is fair and that the procedure was correctly carried out.

Can dissenting classes of creditors be crammed down?

Not applicable. All unsecured creditors vote together as a single class. Preferred and secured creditors cannot be crammed down.

No, each class of creditors must vote in favour of the Scheme.

Yes, if: (i) no member of the dissenting class would be worse off in the ‘relevant alternative’; and (ii) at least one class that would receive a payment or have a genuine economic interest in the company in the relevant alternative voted in favour of the Plan.

8.2  COMPANY VOLUNTARY ARRANGEMENTS (CVAS) 8.2.1 Overview A CVA is defined in s 1(1) IA 1986 as: • a composition in satisfaction of a company’s debts; or • a scheme of arrangement of the company’s affairs (which term should not be confused with the separate Scheme of Arrangement procedure described later in this chapter). The terms are not synonymous. A  composition is an agreement with creditors that they will receive the payment of a sum of money in place of some existing debt or obligation. The courts have made it clear that a scheme of arrangement differs from a composition in that it need not offer any compromise or release of creditors’ debts (March Estates Plc v Gunmark [1996] 2  BCLC  1). In IRC  v Adam & Partners Ltd [2001] 1  BCLC  222 it was held that a proposal where no payment at all was envisaged to unsecured creditors could still give rise to a valid CVA. Normally, however, a CVA proposal will offer some payment to the creditors concerned.

8.2.2  Commencing a CVA Table 8.2 shows the CVA process in flowchart form. 214

CVAs, Schemes of Arrangement and Restructuring Plans 8.2 Table 8.2 – The CVA process

Instigated by Directors

Instigated by Administrator/Liquidator

Directors prepare proposals and statements of affairs and appoint nominee (eligible company may also apply for moratorium)

Administrator/liquidator prepares proposals and statement of affairs – they would usually act as nominee themselves

Nominee considers proposals and reports to court within 28 days on whether the proposals should be put to members and creditors

Nominee gives 14 days’ notice to creditors inviting them to consider the proposal by way of a decision procedure and to members of a members’ meeting

Creditors and the members vote on proposals (including any amendments to proposals put forward)

Nominee reports to court on approval of CVA. Creditors may challenge CVA within 28 days of date of report to court if they have been unfairly prejudiced or if there has been a material irregularity

Nominee becomes supervisor and implements proposals

CVA succeeds. Supervisor makes final report within 28 days to creditors and members. Company survives

CVA fails. Supervisor takes the actions required of them in this event by the terms of the CVA, eg he presents a winding-up petition

8.2.2.1  Who may propose a CVA? A CVA may be proposed by: •

the directors of the company (provided it is not in administration or liquidation); or

•

an administrator or liquidator. 215

8.2  CVAs, Schemes of Arrangement and Restructuring Plans

8.2.2.2  Proposal by the directors Where the directors plan to propose a CVA, their first step will be to identify an appropriately qualified insolvency professional and to discuss the process with them in advance. The insolvency professional will then have various roles. They will need to advise the directors as to whether a CVA is appropriate and to act as nominee prior to approval of the CVA, as chair of the meetings and as supervisor in the event that the proposal is approved. A nominee or supervisor must either be a qualified insolvency practitioner or a person otherwise qualified so to act. Statement of Insolvency Practice 3.2 (‘SIP 3.2’) addresses their various roles and responsibilities. The directors’ formal role is: •

To prepare a proposal for the intended nominee. This will include a short explanation of why, in their opinion, a CVA would be desirable, and will give reasons why the creditors might be expected to concur. The contents of a proposal generally are discussed in Section 8.2.3. In practice, the insolvency practitioner is likely to have provided the directors with considerable assistance in formulating this.

•

To prepare a statement of affairs. Rule 2.6 IR 2016 sets out the matters to be covered here, but essentially it will need to give details of the company’s assets and their estimated values, details of any security over those assets and of the claim of the security holder, the names and addresses of the company’s unsecured creditors and the amounts of their respective claims, details of any debts owed by or to the company to or by a person connected with it and the names and addresses of the company’s members and details of their shareholdings. The statement must also be made up to a date which is not earlier than two weeks before the date of the proposal for the CVA.

In this regard, it is an offence if, for the purpose of obtaining the approval of the members or creditors of a company to a proposal for a CVA, an officer of the company makes any false representation or fraudulently does, or omits to do, anything (s 6A IA 1986). The insolvency practitioner’s formal role as nominee is to submit a report to the court within 28 days of receiving the proposal stating whether, in their opinion, the proposed CVA has a reasonable prospect of being approved and implemented and whether, therefore, the proposal should be considered by a members’ meeting and by the company’s creditors (s 2 IA 1986). Given that there is no formal requirement for the directors to take advice when putting together their proposal, this provision is designed to ensure that a proposal is still reviewed in advance by an appropriately skilled and qualified person. The case of Re a Debtor (No  140  IO of 1995), Greystoke Hamilton-Smith [1996] 2 BCLC 429 (which concerned an individual voluntary arrangement) suggested that the nominee needs to satisfy themselves on three counts: •

that the company’s true position as to assets and liabilities is not materially different from that which it is represented to creditors to be;

•

that the proposal has a real prospect of being implemented in the way which it is represented to be; and

•

that there is no already manifest but unavoidable prospective unfairness.

The second count is effectively the same as that now required by s 2 IA 1986. If the nominee cannot satisfy themselves that the other two conditions are met, but still 216

CVAs, Schemes of Arrangement and Restructuring Plans 8.2 recommends that the meetings should be held, they need to make the circumstances clear in their report. The case also makes it clear that, whilst the nominee does not have a statutory duty to investigate the company’s affairs, they should still review the financial information provided by the directors and, if they have doubts, make further enquiries. SIP 3.2 duly requires the nominee to have procedures in place to be able to set out objectively in their report whether: •

the company’s financial position is materially different from the position depicted in the CVA proposal, explaining the extent to which the financial information in the proposal has been verified;

•

the CVA is manifestly unfair; and

•

the CVA has a reasonable prospect of being approved and implemented.

8.2.2.3  Proposal by an administrator or liquidator An administrator or liquidator’s proposal needs to specify the same matters as would a directors’ proposal, and such other matters as they consider appropriate for ensuring that the members and creditors of the company are able to reach an informed decision, together with information regarding the value of the prescribed part and details of the nature and amount of the company’s preferential creditors (r 2.3 IR 2016). It is likely that any administrator or liquidator making a proposal will themselves perform the role of nominee. There is no need for a report to the court.

8.2.2.4  Seeking the creditors’ decision The nominee must deliver to each creditor a notice seeking their decision on the proposal (s  3(1)(b) IA  1986 and r 2.25  IR  2016). Section 3.3.3.3 has previously described where a notice may be given by e-mail. The decision date stipulated in the notice must be at least 14 days’ notice from the date of delivery of the notice, but not more than 28 days from the date on which the nominee’s report is filed at court (r 2.27 IR 2016). The notice may stipulate any of the decision procedures prescribed in r 15.3 IR 2016 (other than a physical meeting), ie: • correspondence; •

electronic voting;

•

a virtual meeting; or

•

any other decision-making procedure which enables all creditors who are entitled to participate in the making of the decision to participate equally.

However, as s 3(3) IA 1986 requires the decision is required to be made by way of a ‘qualifying’ decision procedure, it is not possible to seek the creditors’ decision by way of the deemed consent procedure described in s 246ZF IA 1986. In practice, approval of CVAs is normally sought at virtual meetings (or a physical meeting if so requested by the requisite number of creditors) as that provides the 217

8.2  CVAs, Schemes of Arrangement and Restructuring Plans flexibility to adjourn in order to modify the CVA if it appears that the creditors will not approve the proposal in its existing form. The notice must comply with the various other requirements set out in rr 2.25(5) and 15.8 IR 2016. Amongst other things, the present notice must contain: •

an explanation of how a creditor may propose a modification to the proposal and how the nominee will deal with such a modification;

•

an explanation of creditors’ voting rights and the requisite majority of creditors for making decisions;

•

in the case of a meeting, a statement that any proxy given by a creditor to allow another person to vote on their behalf at that meeting must be delivered to the convener or chair of the meeting before it may be used at that meeting; and

•

a statement that creditors who meet the thresholds in s 246ZE IA 1986 may request a physical meeting.

The relevant decision procedures are as further described in Section 4.6.5.3, and the processes by which creditors may request a physical meeting is as described in Section 4.3.5.4. If the prescribed proportion of creditors does require a physical meeting to take place, then it must take place within 14 days and a notice of the meeting must be delivered to the creditors at least seven days before the date fixed for the meeting (r 2.31 IR 2016). The notice must be accompanied by: •

a copy of the proposal;

•

a copy of the statement of affairs or, if the nominee thinks fit, a summary of it which includes a list of creditors and the amount of their debts; and

•

in the case of a directors’ proposal, the nominee’s comments on the proposal.

Finally, the nominee is entitled to state in the notice that they will use a website to make the results of the consideration of the proposal available and for comments on the proposal to be made (r 2.25(7) IR 2016).

8.2.2.5  Summoning the members’ meeting The nominee must also deliver a notice to each person they believe to be a member, inviting them to consider the proposal at a members’ meeting (s 3(1)(a) IA 1986 and r 2.25 IR 2016). The members’ meeting must be held within five business days of the creditors’ decision date. In practice, however, they will normally be scheduled for the same day, with the creditors’ decision first, then the members’ meeting (r 2.28 IR 2016). The nominee must give at least 14 days’ notice of this meeting to: •

the members;

•

every officer or former officer whose presence the nominee thinks is required; and

•

all other directors.

Every officer or former officer who receives notice that their presence is required must attend the meeting (r 2.30 IR 2016). 218

CVAs, Schemes of Arrangement and Restructuring Plans 8.2 The accompaniments to this notice are similar to those described in Section 8.2.2.4. In addition, the nominee must also give notice of the venue for the meeting, and give members information about their voting rights, the majority for passing a resolution and their rights of appeal. A nominee sending out such a notice will need therefore to check the company’s articles of association in order to ascertain what these voting rights are.

8.2.3  The content of a proposal 8.2.3.1  General provisions Rule 2.3 IR 2016 sets out a list of matters required to be dealt with in the proposal. These include details of: •

the company’s assets, including which assets are subject to security and which will be included in and which will be excluded from the CVA;

•

the company’s liabilities, including details of how these will be met, modified, postponed or otherwise dealt with in the CVA;

• the nominee’s proposed fees and expenses; • the supervisor’s contact details and functions, their status as a qualified insolvency practitioner and their recognised professional body, and how their fees and expenses will be determined and paid; • any guarantees given in respect of the company’s debts, or which are being offered for the purposes of the CVA; •

the proposed duration of the CVA, and proposed dates of distribution to creditors;

•

how the business of the company will be conducted during the CVA;

•

any further proposed credit facilities for the company and how these will be repaid;

•

how any funds held for the purposes of the CVA will be dealt with pending distribution to creditors, and how any funds held for the purpose of payment to creditors will be dealt with if not so paid, on termination of the CVA; and

• any other matters that the proposer considers appropriate to enable members and creditors to reach an informed decision on the proposal. SIP 3.2 requires the nominee to ensure that the proposal is considered objectively and includes the additional information set out in Table 8.3. Table 8.3 – Additional information required by SIP 3.2 (a)

Sufficient information for creditors to understand the company’s financial and trading history;

(b)

the roles of the directors and key employees and their future involvement in the company, including the background and financial history of the directors where relevant;

(c)

any additional specialist assistance which may be required by the company which will not be provided by any supervisor appointed, and the reason why such assistance may be necessary;

219

8.2  CVAs, Schemes of Arrangement and Restructuring Plans (d)

if the company has become, or is about to become, insolvent, why;

(e)

any other attempts that have been made to solve the company’s financial difficulties, and the alternative options considered, both prior to and within formal insolvency by the company;

(f)

a comparison of the estimated outcomes of the CVA and the outcome if the CVA is not approved;

(g)

where relevant, sufficient information to support any profit and cash projections, subject to any commercial sensitivity;

(h)

an explanation of the role and powers of the supervisor;

(j)

details of any discussions that have taken place with key creditors;

(j)

where it is proposed that certain creditors are to be treated differently, an explanation as to which creditors are affected, how and why, in a manner which aims to be clear and useful;

(k)

an explanation of how debts are to be valued for voting purposes, in particular where the creditors include long term or contingent liabilities;

(l)

disclosure of the estimated costs of the CVA including the proposed remuneration of the nominee and the supervisor and the bases for those estimates;

(m)

the cost of any additional specialist assistance which will not be provided by any supervisor appointed;

(n)

the identity of the source of any referral of the company, the relationship or connection of the referrer to the company and, where any payment has been made or is proposed to the referrer, the amount and reason for that payment;

(o)

details of the amounts and source of other payments made, or proposed to be made, to the nominee and the supervisor or their firms in connection, or otherwise, with the proposed CVA, directly or indirectly and the reason(s) for the payment(s);

(p)

an explanation of how debts which it is proposed are compromised will be treated should the CVA fail;

(q)

the circumstances in which the CVA may fail; and

(r)

what will happen to the company and any remaining assets subject to the CVA should the CVA fail.

If the CVA does not have the benefit of a continuing administration moratorium, it is wise for the proposal to make it expressly clear that creditors’ rights are limited to the receipt of their entitlements under the CVA and that they no longer therefore have the right to take independent action against the company. The proposal will generally also state what will happen to the CVA assets, should the CVA fail. In Re NT  Gallagher & Sons Ltd [2002]  BCC  867, the court held that a provision stipulating that the CVA assets were to be held on trust for the CVA creditors remained effective following the failure of the CVA and the company’s consequent liquidation, but that the company’s other assets would be available for distribution in the liquidation. A  set of standard proposal terms has been issued by the Association of Business Recovery Professionals and these will assist in many cases.

8.2.3.2  Can the proposal treat creditors differently? The legislation contains special provisions to protect secured and preferential creditors (see Section 8.2.4.3). However, there are no special rules regarding the treatment of unsecured creditors, and the pari passu principle has no application to 220

CVAs, Schemes of Arrangement and Restructuring Plans 8.2 a CVA. This gives a useful degree of flexibility where, for example, the company only needs to reach a compromise with one type of creditor or where it is necessary to agree to pay particular creditors in full to ensure that the company can continue to trade. All unsecured creditors are entitled to vote on the CVA proposal regardless of how they are treated by the proposal (see Section 8.2.4), so it is entirely possible for a proposal to be approved despite the creditors who are being treated less well voting against it. Differential treatment does nonetheless raise the prospect that creditors who are being treated less well will subsequently challenge the CVA on the basis that they are being unfairly prejudiced (see Section 8.2.6.2). However, the courts have made it clear that differential treatment is not conclusive in itself of unfair prejudice. The CVA has therefore become a useful restructuring tool for companies with surplus rented premises (or premises where the rent is otherwise regarded as too high) which are unable to reach consensual arrangements with the landlords concerned. CVA proposals of this kind have been approved by the creditors of, amongst others, Pizza Express, BHS, New Look, Buzz Bingo, Debenhams and the Arcadia Group. These proposals have typically divided landlords into separate categories, depending on whether or not the company wished to retain the premises concerned. Typically, most classes of creditors other than landlords have continued to be paid in full. Notwithstanding the approval of their CVA proposals, however, not all of the above companies have survived in the longer term (for example, BHS fell into administration less than two months of the date on which its CVA was approved). Similarly, the CVA has also frequently been used as an exit in football club administrations. In fact, until 2015 it was a league requirement that the administrators of any club in administration used a CVA as a means to exit the administration, although that requirement was replaced by a requirement that a fixed minimum payment is made to the administrator for distribution to unsecured creditors in order to avoid the club being further penalised with a points deduction. The Premier League and the Football League are each entitled to expel from the league a club which enters administration. However, they will not do so where they are satisfied that a CVA or Scheme of Arrangement has been approved and that debts due to football creditors have been paid in full. Football creditors include other football clubs (for unpaid transfer fees) and players (for unpaid wages) and the leagues themselves. This led to a substantial disparity of treatment in some cases. In the case of Plymouth Argyle FC, for example, the football creditors were paid in full and the other unsecured creditors received only 0.77 pence in the pound, albeit from funds provided by a third party purchaser – these other unsecured creditors would have received nothing on a liquidation. The Football League formally addressed the issue in 2015 and imposed an additional requirement that other ‘non-football’ creditors must receive at least 25 pence in the pound (or 35 pence if paid over three years or more) or else the club could face certain penalties, including points deductions. HMRC, in its capacity as one of these other unsecured creditors, has frequently but unsuccessfully challenged CVAs of this kind – see, for example, IRC v Wimbledon FC  [2004]  BCC  638 and HMRC  v Portsmouth City Football Club Limited [2010] EWHC 2013 (Ch). (It has also separately but unsuccessfully challenged the Football League’s rules as a breach of the anti-deprivation principle and/or the pari passu basis of distribution – see Section 2.7.3.1.) 221

8.2  CVAs, Schemes of Arrangement and Restructuring Plans

8.2.4  The creditors’ and members’ decisions 8.2.4.1 Overview The nominee will normally preside over the members’ meeting and any creditors’ meeting as chair, although if for any reason they are unable to attend provisions are made for them to nominate another suitably experienced member or employee of their firm in their place (r 2.34 IR 2016). The main function of both the creditors’ decision procedure and the members’ meeting is to decide whether to approve the proposed CVA. If those voting are unwilling to support the proposal as it stands, it is possible to make modifications to the original proposal. These may include the replacement of the existing nominee with some other appropriately qualified person. Modifications must not, however, result in the proposal ceasing to be a proposal for a composition or scheme of arrangement (ss  4(1) and 4(2)  IA  1986). SIP  3.2 sets out guidance for the supervisor when considering proposed modifications, and includes that the company and creditors fully understand the impact of the modifications on the CVA and its viability.

8.2.4.2  Voting and valuing claims for voting purposes Rules 15.20 to 15.35 IR 2016 set out the general procedure for virtual or physical meetings. However, an overview is given here. Creditors’ votes are calculated according to the amount of the creditors’ debt as at the date of the meeting or, where the company is in liquidation or administration, as at the date on which the liquidation or administration commenced. There is effectively a two-limb test to determine whether a CVA proposal, or any modification to the proposal, is approved: •

For a the proposal or modification to be approved, more than 75% of the votes by value cast by creditors present in person or by proxy must be in favour.

•

However, the proposal or modification will not be approved if, when the votes of creditors who are connected with the company are disregarded, more than 50% by value of the votes cast by the remaining creditors present in person or by proxy are against it.

Every creditor, secured or unsecured, who has notice of the decision procedure is entitled to vote (r 15.28(5)  IR  2016). Secured creditors are generally only able to vote in respect of the balance of their debt (if any) after deducting the value of their security (r 15.31(4) and (5) IR 2016). There is no voting by class of creditors notwithstanding that the CVA may affect creditors differently. A nominal value of £1 will be placed on an unliquidated debt, or one whose value is unascertained, save to the extent that the chair agrees to put a higher value on it (r 15.31(3) IR 2016). The chair should only do so where a specific figure for that higher value can safely be ascertained without the need for speculation (Chittenden v Pepper [2007]  BCC  195). The court considered the meaning of ‘unliquidated’ and ‘unascertained’ in HMRC  v Portsmouth City Football Club Limited [2010] EWHC 2013 and concluded in that case that it was appropriate to put a value of £1 on the claims which HMRC would have if payments to players for ‘image 222

CVAs, Schemes of Arrangement and Restructuring Plans 8.2 rights’ were established to be a sham. Similarly, a value of £1 will be placed on a landlord’s claim for voting purposes in respect of ‘future’ rent which is to fall due in respect of premises occupied by the company after the CVA is approved, unless the landlord is able to submit valuation evidence to support its claim or the proposal contains some other mechanism for valuing claims for future rent. The chair also has a general discretion to accept or reject claims, although in situations of doubt, the proper course is to mark the vote as ‘objected to’ and to allow the creditor to vote. The vote may subsequently be declared invalid if the objection is sustained. There is a right to appeal to the court against a chair’s decision, although such an appeal must be made within 28 days of the date on which the chair’s report on the outcome of the meeting is submitted to the court (see Section 8.2.4.7). If the chair’s decision is reversed or a vote declared invalid, the court may order another decision procedure to be initiated or make such order as it thinks fit.

8.2.4.3  How do proxies work? A proxy will be required if a creditor wishes another individual to attend a virtual or physical meeting on their behalf. Rules 16.1 to 16.9 IR 2016 deal specifically with proxies. That proxy may direct the proxy-holder how to act at that meeting by giving specific instructions. This may be the creditor’s preferred approach where they wish simply to appoint the chair of the meeting as their proxy. (The rules prevent the chair from using a proxy to increase or reduce the remuneration or expenses of any nominee or supervisor unless the proxy expressly allows them to do so.) Where the creditor’s own representative will attend, however, it may be wiser to submit a proxy that allows the representative to vote according to their discretion, as this allows for greater flexibility. It is possible also for a creditor to submit a blank proxy which contains neither the name of a proxy-holder nor instructions as to how the person will act, but containing a note to the effect that the proxy may be completed with the name of the person or the chair of the meeting who is to be proxy-holder (r 16.3 IR 2016).

8.2.4.4  Voting at the members’ meeting Members vote in accordance with their normal rights under the articles of the company. Unless the articles provide otherwise, any resolution will be passed if more than 50% in value of the votes cast by members present in person or by proxy are in favour.

8.2.4.5  Secured, preferential and moratorium creditors No proposal or modification may be approved: •

which affects the right of a secured creditor to enforce its security, except with the concurrence of the secured creditor concerned (s 4(3) IA 1986);

•

under which any preferential creditor is to lose their priority status vis-à-vis the other creditors, or is to be paid a smaller proportion of its debt than another 223

8.2  CVAs, Schemes of Arrangement and Restructuring Plans preferential creditor, except with the concurrence of the preferential creditor concerned (s  4(4)  IA  1986). In the IRC  v Wimbledon case described above, however, the court held that this applied only to the treatment of the company’s own assets. Where third-party monies were used to pay certain creditors in full even where preferential creditors suffered a shortfall these strictly speaking fell outside the CVA; or •

which would result in moratorium debts and priority pre-moratorium debts (see Section 2.4.2.3) not being paid in full where the nominee’s report for the CVA is submitted to the court within a 12 week period beginning with the end of a Part A1 Moratorium (s 4(4A) IA 1986) except with the concurrence of the relevant creditor (s 4(4B) IA 1986).

8.2.4.6  What happens if the members and creditors reach different decisions? Should the members reach a different decision from the creditors, the decision of the creditors prevails over that of the members. However, a dissatisfied member may apply to court within 28 days beginning with the date of the creditors’ decision (or, if later, the date of the members’ meeting). The court may order that the members’ decision has effect instead, or make any other order it thinks fit (s 4A IA 1986).

8.2.4.7  Reporting the outcome Within four business days of the conclusion of the members’ meeting, the chair of the meeting must report the result of the meeting to the court, and immediately after this must send notice of the result of the meeting to anyone who was originally sent notice of the meeting (s  4(6)  IA  1986 and r 2.38  IR  2016). Strictly speaking, the chair of any creditors’ meeting (or, if no meeting was held, the person who sought the creditors’ decision) is under a separate duty to report the creditors’ decision (s 4(6A) IA 1986), although in the vast majority of cases it seems likely that there will be a single report. Assuming that the CVA was approved, the newly appointed supervisor also needs to send a copy of the chair’s report to the Registrar of Companies.

8.2.5  The effect of approval 8.2.5.1  Who is bound? Once approved, the CVA takes effect as if made by the company at the creditors’ meeting and binds every person who: •

had notice of and was entitled to vote at that meeting (whether or not they were in practice present or represented at it); or

•

would have been entitled to vote had they had notice of it

as if they were a party to the CVA (s 5(2) IA 1986). A creditor falling into the second category above might conceivably still challenge the CVA on the basis that there has been a material irregularity (see Section 8.2.6.3). 224

CVAs, Schemes of Arrangement and Restructuring Plans 8.2 They will otherwise remain bound, but will gain an entitlement under the CVA. If they have not been paid their entitlement when the CVA comes to an end, then the company must pay them their entitlement at that point (unless the CVA has ended prematurely) (s 5(2A) IA 1986). This raises a potential problem if the company has not factored in the possibility of this additional creditor emerging when calculating the amounts due to each creditor under the CVA. In cases where the company considers there is a good chance that there will be creditors who do not receive notice of the meeting, it may be wise for the CVA to contain provisions allowing adjustments should such creditors later emerge. Where a creditor would not have been entitled to vote at the meeting, whether or not they received notice of it, they will not be bound by the CVA and can continue to pursue their existing rights. However, if the company was in administration prior to approval of the CVA and this is not brought to an end, the administration moratorium will remain in place and the usual considerations apply (see Chapter 4).

8.2.5.2  What is the effect on an existing formal insolvency process? Under s 5(3) IA1986, if the company is already in liquidation or administration, the court may: •

stay the liquidation proceedings, or provide for the administrator’s appointment to cease to have effect; and/or

•

give such directions with respect of the conduct of the liquidation or administration as it thinks appropriate for facilitating the implementation of the CVA.

However, it will not make any order until either 28 days have elapsed, beginning with the date on which the chair’s report has been filed without an application by an aggrieved party having been made, or at any time whilst such an application or an appeal in respect of such an application remains pending, or during a period within which such an appeal might be brought. As discussed in Chapter 7, if a CVA is proposed while a Part A1 Moratorium is in effect but will not be voted on until the moratorium would otherwise end then the moratorium will be automatically extended until the CVA comes into effect, is not approved by the company and its creditors, or is withdrawn (s A14 IA 1986).

8.2.5.3  What is the effect on a co-debtor or guarantor? If a creditor enters into a consensual compromise with a principal debtor, then a third party co-debtor or guarantor may well be released as a result of the variation of the terms of the debt, unless they have specifically consented to it. Historically, the courts have taken the view that these parties will not be released when the debtor enters into a CVA because this is a statutory, not a consensual, compromise (March Estates Plc v Gunmark [1996] 2  BCLC  1). However in Johnson v Davies [1998] 2 BCLC 252, the court held that in principle such a party might still be released as a result of a CVA, because the creditor is still effectively deemed to have consented to the arrangement. Often this will not be an issue – a well-drafted guarantee or other agreement will expressly provide that third parties will not be released as a result of a compromise between the creditor and the debtor (Lombard Natwest Factors 225

8.2  CVAs, Schemes of Arrangement and Restructuring Plans v Koutrouzas [2003]  BPIR  444). Nonetheless, because of Johnson v Davies, the position is not absolutely clear where there is no such provision. It is also legally possible for the CVA itself expressly to provide that a creditor cannot enforce an obligation against a third party who would then in turn have a right of recourse against the company, such as a co-debtor or guarantor (Prudential Assurance Co Ltd v PRG Powerhouse Ltd [2007] BCC 500, para 60). The facts of the Powerhouse case are set out in the box in Section 8.2.6. A CVA subsequently proposed by Sixty UK Ltd also attempted to compromise claims against guarantors, but like that of Powerhouse, failed to survive an unfair prejudice challenge on the basis that the creditors which benefited from the guarantees were not adequately compensated for their guarantees being released (Mourant & Co Trustees Ltd v Sixty UK Ltd [2010] EWHC 1890 (Ch)).

8.2.5.4  What is the effect on supply contracts? The provisions of the IA 1986 which protect contracts for the supply of goods and services in an administration are discussed in detailed in Section 4.9. The provisions of ss 233, 233A and 233B IA 1986 all apply in exactly the same way where a CVA takes effect in relation to a company, save that: •

for the purposes of ss 233 and 233A IA1986, the relevant insolvency officeholder will be the supervisor of the CVA rather than the administrator; and

•

for the purposes of s 233B(5) IA1986 the company’s directors rather than the administrator would give any necessary consent to terminate a contract.

8.2.6  Can a party challenge the CVA? 8.2.6.1  The mechanism for a challenge Under s 6 IA 1986, any person entitled to vote at either meeting (or who would have been entitled to vote had they had notice) may challenge the decisions arrived at by the meetings on the grounds that: •

the arrangement unfairly prejudices the interests of a creditor or member; or

•

that there has been some material irregularity at or in relation to either the meeting of the members or the decision procedure of the directors.

The nominee or (if the company is in liquidation or administration) the administrator or liquidator may also challenge on the same bases. Any challenge must be made: •

within 28 days beginning with the date on which each of the reports required by s 4(6) and (6A) IA 1986 has been filed with the court (see Section 8.2.4.7); or

•

in the case of a person who was not given notice of the relevant decision procedure, within 28 days of the date on which that person became aware that the relevant decision procedure had taken place. However, such a person may not challenge a decision where the CVA has already come to an end, unless it ended prematurely. 226

CVAs, Schemes of Arrangement and Restructuring Plans 8.2 The courts have made it clear that this 28-day time limit is fixed and cannot be extended (Re Bournemouth and Boscombe AFC Co Ltd [1998] BPIR 183). (In Gold Fields Mining LLC  v Tucker [2009]  EWCA  Civ 173, the court drew a distinction between this rule and the construction of a provision within the CVA itself dealing with the submissions of claims by creditors who had not originally had notice of the meeting). The court has the power to revoke or suspend any decision approving the CVA, and/or to give a direction that further meetings should be summoned either to reconsider the original proposal or to consider any revised proposal. It can also give supplemental directions, in particular to deal with things done since the CVA took effect. The court’s role is not, however, to impose terms of its own which might be more advantageous than those accepted by the creditors (Sisu Capital Fund Ltd v Tucker [2006] BCC 463).

8.2.6.2  Unfair prejudice It is insufficient for these purposes that the applicant has been prejudiced – the applicant must demonstrate that the prejudice in question was unfair. The courts have made it clear that there is no universal test for unfairness, but that it is necessary to consider all of the circumstances and alternatives available and practical consequences of a decision to confirm or reject the CVA. Various guidance on what is involved in this exercise can be found in the leading cases of Powerhouse (the facts of which are set out in the box below), New Look Retailers Limited and Discovery (Northampton) Ltd v Debenhams Retail Ltd [2019] EWHC 2303 (Ch). Most fundamentally, this exercise will include: • a ‘vertical’ comparison with the position under a liquidation. If the CVA is likely to result in creditors receiving less that they would on a liquidation which is concluded within a reasonable timeframe, then it is hard to see a case where the courts will not intervene (see comments made in Re T&N Ltd [2005] 2 BCLC 488); and • a ‘horizontal’ comparison with the treatment of other creditors or classes of creditors under the CVA. As noted in Section 8.2.3.2, the courts have rejected arguments that differential treatment is in itself unfair prejudice, and have noted indeed that in some circumstances differential treatment may be necessary to ensure fairness. The court will consider the extent and justification for differential treatment. For example, in Carraway Guildford (Nominee A) Ltd v Regis UK Ltd [2021] EWHC 1294 (Ch), the court revoked the CVA as a member loan had been unjustifiably categorised as critical creditor’s debt and left uncompromised, although at the time of writing this decision is being appealed. The extent to which other creditors in the same position as the objecting creditors have approved the CVA will be relevant. In this respect, it may be helpful to make a comparison with the position under a Scheme of Arrangement. The tests for when a Scheme is fair are discussed in Section 8.3.4, and the courts have suggested that it is equally appropriate to consider whether a reasonable and honest man in the applicant’s position might have approved the CVA. The fact that the applicant could have blocked a Scheme because it would have constituted a separate class of creditor 227

8.2  CVAs, Schemes of Arrangement and Restructuring Plans is also relevant and potentially important, although the courts have emphasised that this is not determinative in itself. An important consideration is whether there is a fair allocation of the assets available within the CVA between the compromised creditors and other sub-groups of creditors. Potentially this could involve the court making a comparison with the fairness of an alternative allocation of assets. Obtaining the requisite majorities to pass the CVA using the votes of unimpaired creditors will be a relevant consideration for whether unfair prejudice exists, but a reliance on unimpaired creditors to approve the CVA will not by itself constitute unfair prejudice. Unfair prejudice cannot be ruled out merely because the same result would have been achieved by a Restructuring Plan. A Plan contains additional safeguards for creditors and in particular there is significant court oversight before it becomes effective. Where a CVA proposal involves the compromise of landlord claims: •

paying landlords market rent under a CVA will be helpful in determining that landlords are not being unfairly prejudiced, but payment of below market rent will not automatically be unfairly prejudicial to landlords;

•

providing landlords with additional break rights will significantly mitigate the risk of a finding of unfair prejudice. The break rights effectively provide a landlord with an alternative remedy of seeking a different tenant if that landlord is not satisfied with its treatment under the CVA.

Finally, it is clear that the prejudice must have been caused by the terms of the CVA itself and affect the applicant in the capacity in which they are bound by the Scheme, not in some other capacity (see the list of principles outlined in the Sisu Capital Fund case).

Prudential Assurance Co Ltd v PRG Powerhouse Ltd [2007] BCC 500 The company, an electrical goods retailer, wished to close 35 underperforming stores but to retain its other stores. It proposed a CVA, whereby the rights of creditors in respect of the closing stores would be compromised, but the rights of other creditors would be unaffected. The company’s parent, PRG, agreed to provide funds to pay a dividend of up to 28p in the pound to the creditors of the closing stores. These creditors included landlords who had claims for future rent, and the CVA provided a mechanism for valuing such claims. However, the CVA also included terms designed to release any guarantees or indemnities which PRG had given to these landlords. All creditors, including those creditors who were being paid in full, were able to vote on the CVA proposal, and it was duly approved. However, it was challenged by the landlords holding guarantees, both on the basis that the provisions which purported to affect their rights were ineffective and that it was unfairly prejudicial to them. The court held that, although it was legally possible for a CVA directly to provide that a creditor cannot enforce a guarantor’s obligations, the clauses in the present CVA which were intended to achieve that result did not succeed in doing so. Nonetheless, another clause in the CVA which provided for the release of every 228

CVAs, Schemes of Arrangement and Restructuring Plans 8.2 guarantee given by PRG for a debt of the company to a landlord of a closing store could be enforced by the company on PRG’s behalf. However, the court held that the CVA was unfairly prejudicial to the landlords holding guarantees on the following bases: •

if the company had entered into liquidation, these landlords’ position would be substantially better than under the CVA. Although they may have received no dividend from the company on a liquidation, they would still have been able to rely upon their guarantees;

•

if the company had proposed a Scheme of Arrangement, these landlords would have been treated as a separate class from other creditors, and the creditors who were being paid in full would have been prevented from voting altogether;

•

although it is possible for a CVA to treat different groups of unsecured creditors differently, this CVA discriminated against these landlords by giving more weight to the other creditors and forcibly compromising the landlords’ claims at a fraction of their proper value.

The court was unpersuaded by the company’s argument that earlier possession of the closing stores would be valuable to the landlords as it would give them the chance to re-let, since this was simply a matter of chance. It was also unpersuaded by the argument that PRG’s guarantee might be of little real value, since at the very least the CVA prevented the landlords from negotiating with PRG and obtaining some form of compensation for the loss of the guarantees.

8.2.6.3  Material irregularity A claim of material irregularity might be based on either a breach of the rules or on some other problem with the conduct of the meeting or other decision procedure. This might include: •

a failure to give notice of the meeting or other decision procedure to a creditor (Re a Debtor (No 259 of 1990) [1992] 1 All ER 641);

•

a failure to provide full information to those entitled to vote (Somji v Cadbury’s Schweppes plc [2001] 1 WLR 615, a case concerning an individual voluntary arrangement);

•

a failure by the chair properly to include a creditor’s vote; or

•

the inclusion of sham claims for voting purposes (Gatnom Capital & Finance Limited [2010] EWHC 3353 (Ch)).

In Kapoor v National Westminster Bank plc [2011] EWCA Civ 1083 (another case concerning an individual voluntary arrangement), a connected creditor had assigned a debt to a friend in order to circumvent the provisions concerning the votes of connected creditors. The court made it clear that, notwithstanding that no attempt had been made to conceal this arrangement from the relevant meeting, this was still a material irregularity. An irregularity will, however, not be regarded as ‘material’ unless it affected the outcome of the meeting (Re a Debtor (No  259 of 1990) above). For example, in 229

8.2  CVAs, Schemes of Arrangement and Restructuring Plans Regis UK Limited the court found that a 75% discount of landlord’s claims for future rent was made without adequate justification and so was irregular. In contrast, a 25% discount applied in the New Look Retailers Ltd CVA was found not to be irregular. However, the discount applied in Regis UK Limited did not affect the outcome of the creditors’ vote and so was not a material irregularity.

8.2.6.4  Jurisdictional challenges In Lazari Properties 2 Limited v New Look Retailers Limited [2021] EWHC 1209 (Ch) the claimant landlords sought to overturn the CVA not only on the statutory grounds for challenge described in Sections 8.2.6.2 and 8.2.6.3 but also on the basis that there was no jurisdiction for the CVA proposal at all as it was not a composition or arrangement as required by s 1 IA 1986. The claimants argued that: •

the differential treatment of sub-groups of creditors meant that the proposal was actually multiple separate arrangements and so not a composition in satisfaction of the company’s debts or a scheme of arrangement of its affairs;

•

there was insufficient ‘give and take’ to qualify as a compromise; and

•

termination rights in respect of the leases included in the CVA were improper attempts to interfere with the landlords’ proprietary rights.

However, each of these arguments was firmly rejected by the court. This may limit such jurisdictional challenges in the future.

8.2.7  Implementation of the CVA Once the CVA is approved, the nominee will become the supervisor of the CVA. The supervisor’s main role is then to ensure that the CVA proceeds in accordance with the terms approved by the meetings. The exact scope of this role will depend on those terms, but will almost certainly include receiving assets or payments and then distributing monies to the creditors in accordance with the terms of the CVA. In this respect, the directors, or the liquidator or administrator (as appropriate) must do all that is required to put them into possession of the assets included within the CVA (r 2.39 IR 2016). The supervisor is able to apply to the court for directions on any matter arising under the CVA or to seek a winding-up or administration order should the CVA fail. Any creditor or any other person dissatisfied with an act, omission or decision of the supervisor may apply to the court to seek relief (s 7 IA 1986). The supervisor must deliver progress reports to the Registrar of Companies, the company itself, the creditors bound by the CVA and the members within two months of the end of the 12-month period commencing on the date on which the CVA was approved, at the end of each 12-month period thereafter (r 2.41 IR 2016). In addition, once the CVA has either been fully implemented or has terminated, the supervisor is obliged to give notice to those creditors and the members, which must be accompanied by a final report summarising all receipts and payments in relation to the CVA, explaining any departure from the terms of the CVA and, if the CVA has terminated, explaining why. The supervisor must send copies of this notice and report to the Registrar of Companies and to the court (r 2.44 IR 2016). 230

CVAs, Schemes of Arrangement and Restructuring Plans 8.3 There is no need to disclose the existence of the CVA to the outside world other than through the relevant Companies House and court filings.

8.3  SCHEMES OF ARRANGEMENT AND RESTRUCTURING PLANS 8.3.1 Overview 8.3.1.1  What is a ‘Scheme’ or a ‘Plan’? Parts 26 and 26A CA 2006 both set out statutory procedures whereby a company may make a compromise or arrangement with its members or creditors, or any ‘class’ of them. Something akin to the present Scheme of Arrangement procedure contained in Part 26 has existed for more than 100 years. The English courts have therefore developed a substantial amount of case law which greatly assists in ensuring that a Scheme is a predictable process. The Restructuring Plan procedure contained in Part 26A is a much more recent addition. It is one of the measures first introduced by CIGA 2020 to support companies during the Covid-19 pandemic. However, the decision to insert the provisions relating to a Plan into the CA 2006 immediately after those relating to a Scheme, rather than into the IA 1986, reflects the similarity between a Plan and a Scheme. The explanatory notes to CIGA 2020 indicate that the overall commonality between Part 26 and Part 26A of CA 2006 is expected to enable the courts to draw on the existing body of case law where appropriate. The courts expressly noted these words in the convening hearing for the first ever Plan (Re Virgin Atlantic Airways Limited [2020] EWHC 2191 (Ch)). For this reason, the Scheme and the Plan procedures are considered together here. However, there are still difference between the procedures. These are summarised in Section 8.3.1.6 and discussed further within this Section 8.3 where relevant.

8.3.1.2  What might a compromise or arrangement include? The terms ‘compromise’ and ‘arrangement’ are not defined, although ss 895(2) and 901A(4)  CA  2006 each provides that ‘arrangement’ includes ‘a reorganisation of the company’s share capital by the consolidation of shares of different classes or by the division of shares into shares of different classes, or by both of those methods’. The courts have made it clear that an arrangement is to be interpreted broadly, and is not limited to something analogous to a compromise (Re Guardian Assurance Co [1917] 1 Ch  431). The crucial requirement, however, is that the proposal involves ‘a sequence of steps involving some element of give and take, rather than merely surrender or forfeiture’ (Re Lehman Brothers International (Europe) (in administration) [2018] EWHC 1980 (Ch)). The term ‘creditor’ is not limited to persons who have already a claim against the company, but may extend to persons whose claim against the company are actual, prospective or contingent (Re Lehman Brothers International (Europe) (in administration) [2018] EWHC 1980 (Ch)). 231

8.3  CVAs, Schemes of Arrangement and Restructuring Plans A Scheme or Plan may, however, bind creditors only in their capacity as creditors. Neither a Scheme nor a Plan can be used to impose obligations or interfere with a stakeholder’s proprietary rights. Examples of proprietary rights that cannot be compromised by a Scheme or Plan include: •

the potential claims of account holders for the return of trust property to them (Lehman Brothers (International) Europe (in administration) [2009] EWCA Civ 1161); and

•

the proprietary rights of a landlord against a tenant (Re Instant Cash Loans Ltd [2019] EWHC 2795 (Ch)).

Examples of compromises and arrangements implemented by a Scheme or Plan include: •

extensions to the maturity of debt;

•

amendments to the terms of debt;

•

debt for debt swaps;

•

debt for equity swaps; and

•

amendments to the terms of leases (including compromises of the rent payable under leases).

8.3.1.3  Who can propose a Scheme or a Plan? Sections 896(2) and 901C(2) CA 2006, respectively stipulate the range of persons who can propose a Scheme or a Plan. The proposer would normally be the company itself. However, where the company is in administration or liquidation, it may instead be proposed by its administrator or liquidator. For example, in Re Amicus Finance Plc [2021]  EWHC  2255 (Ch), the administrators proposed a Plan with a view to restoring the company to solvency. It is also possible for any creditor or member to propose a Scheme or Plan. Indeed in Re Countrywide PLC [2009] EWHC 1347, the Scheme was proposed by a group of loan note holders who were keen to eliminate any risk that the company would become cash flow insolvent. However, it will be difficult in practice for a creditor or member to propose a Scheme or Plan which is at odds with the approach favoured by the company. In Re Savoy Hotel Limited [1981] Ch 351 the court held that it has no jurisdiction to sanction a Scheme without the approval of the company, and it feels likely that this approach would also be followed for a Plan.

8.3.1.4  Financial difficulties Restructuring Plans, unlike Schemes, also require the company which is the subject of the Plan to satisfy the two entry conditions set out in s 901A(2) and (3) CA 2006. These are that: •

the company has encountered, or is likely to encounter, financial difficulties that are affecting, or will or may affect, its ability to carry on business as a going concern (‘Condition A’); and

•

the purpose of the proposed compromise or arrangement between the company and its creditors, or members (or any class of its creditors or members) is 232

CVAs, Schemes of Arrangement and Restructuring Plans 8.3 to eliminate, reduce or prevent, or mitigate the effect of, any of the abovementioned financial difficulties (‘Condition B’). It is not essential that the company continue as a going concern following implementation of the Plan so long as the Plan would mitigate the losses that creditors would otherwise suffer (Re DeepOcean 1 UK Ltd [2020] EWHC 3549 (Ch)). In Re Gategroup Guarantee Limited [2021] EWHC 304 (Ch) the court held that a Plan, unlike a Scheme, was therefore a collective insolvency procedure. This is discussed further in Section 12.6.6.

8.3.1.5  Can guarantees or joint liabilities be released? As part of a compromise or arrangement a Scheme or Plan can release or compromise guarantees and indemnities given by the company as the beneficiaries of such guarantees and indemnities are contingent creditors of the company. It is also possible for a Scheme or Plan to release the liabilities of a guarantor of the Scheme or Plan company. The reasoning is that if the guarantee was not released then the guarantor would have a subrogated claim against the Scheme or Plan company. Allowing this ‘ricochet claim’ to remain would undermine the purpose of the Scheme of Plan. Accordingly, the court has been willing to sanction the release of guarantees given by third parties as ‘necessary in order to give effect to the arrangement proposed for the disposition of the debts and liabilities of the company to its own creditors’ (Re Lehman Brothers International (Europe) (in administration) [2009] EWCA Civ 1161). A restructuring tactic has developed whereby a new company is incorporated for the specific purpose of undergoing a Scheme or Plan. The new company enters into a deed poll pursuant to which it agrees to indemnify the debtholder for the debt of a member of the group which the Scheme or Plan is seeking to restructure. The assumption of liabilities makes the new company’s liabilities co-extensive and dependent on the liabilities of the other members of the group. Although artificial, this structure means that in order to restructure the debt of the new company the Scheme or Plan must restructure the underlying debt of the other members of the group. This allows the Scheme or Plan to restructure debts of different companies in a group in a single process. For example: • in Re All Scheme Ltd [2022] EWHC 549 (Ch), a special purpose vehicle agreed to assume primary liability for customer redress and financial ombudsman claims for various companies within the Amigo Loans group so that all claims were restructured under a single Scheme; and • in Re Gategroup Guarantee Ltd [2021] EWHC 304 (Ch) a newly incorporated English company agreed to indemnify the senior lenders of a loan borrowed by a Luxembourg company and the holders of Swiss law governed bonds issued by a Swiss member of the group. This facilitated the restructuring of both debts under a single Plan and avoided difficulties in obtaining the quorum of bondholders needed to consensually agree an amendment at a bondholders’ meeting.

8.3.1.6  Secured, preferential and moratorium creditor Unlike a CVA, a Scheme or Plan can compromise the claims of secured and preferential creditors. In Re Houst Limited [2022] EWHC 1941 (Ch), for example, 233

8.3  CVAs, Schemes of Arrangement and Restructuring Plans the company used a Plan to compromise HMRC claims as a preferential creditor by way of a cross-class cram-down. However, like a CVA, neither a Scheme nor a Plan can be used to compromise moratorium debts and priority pre-moratorium debts (see Section 2.4.2.3) where the application to court is made within a 12-week period beginning with the end of a Part A1 Moratorium except with the agreement of the relevant creditor (ss 899A and 901H CA 2006).

8.3.1.7  What is the process for adopting a Scheme? Table 8.4 shows the Scheme of Arrangement and Restructuring Plan process in flowchart form. The procedure for adopting a Scheme requires two court hearings and one or more meetings. The steps are as follows: •

The proposer draws up the terms of the proposed Scheme and applies to the court.

•

The proposer, now the ‘applicant’, notifies the creditors and members who will be affected and advertises the fact that this notice, known as the ‘practice statement notice’, has been given.

•

At this first hearing, known as the ‘convening hearing’, the court makes an order requiring the applicant to convene meetings of the classes creditors or members who will be affected by the Scheme, and gives directions on matters such as how the proposer should give notice of the meetings (s 896 CA 2006).

•

The applicant gives notice of the meetings to all members of relevant classes in accordance with the court order.

•

At each meeting, the Scheme is proposed, considered and voted on by each class.

•

Provided that each of the meetings approves the Scheme by the required majority, the proposer then re-applies to the court for final approval, or ‘sanction’. (In practice, the initial application to court referred to above is likely to include this application as well.)

•

At this second hearing, known as the ‘sanction hearing’, the court decides whether to sanction the Scheme.

•

The Scheme becomes effective when the terms of the Scheme so provide, although it cannot become effective until the company makes a filing following the hearing (s 899 CA 2006).

As a result of these various requirements, a Scheme will typically take at least two to three months to implement. The applicant will also need to obtain court dates for the hearings in advance.

8.3.1.8  What is the process for adopting a Plan? The procedure for adopting a Plan is similar to that for a Scheme, except that: •

as a preliminary step, the proposer will also need to ensure that the company meets the two entry conditions for a Restructuring Plan described in Section 8.3.1.2; 234

CVAs, Schemes of Arrangement and Restructuring Plans 8.3 •

at the convening hearing, the applicant may also apply for an order to exclude a class of creditors or members of the company from voting where no one in that class has a genuine economic interest in the company (see Section 8.3.4.2);

•

when voting at meetings to approve a Plan, while like a Scheme, for a class of creditors or members to approve a Plan 75% by value of those creditors or members must vote in favour of the proposed Restructuring Plan, unlike a Scheme there is no requirement that a majority by number must also vote in favour (see Section 8.3.6.1);

•

at the sanction hearing, the applicant can still apply for the court to sanction a Plan even if not all classes voted to approve the Plan by the requisite majority as the court has the power to effect a so-called cross-class cram-down (see Section 8.3.6).

In addition, the provisions of s 233B IA 1986 relating to contract for the supply of goods and services apply to a Plan but not to a Scheme (see Section 8.3.1.9).

8.3.1.9  Does either process include a moratorium? There is no automatic statutory moratorium available for companies proposing a Scheme or Plan. However: •

the company may apply for a moratorium under Part A1 IA 1986 (see Chapter 7). Section A15 IA 1986 provides the court with the power to order an extension of the moratorium at the convening hearing. If ordered, that extension will most likely extend the moratorium until the Scheme or Plan comes into effect (if sanctioned);

•

creditors may contractually agree to postpone their enforcement rights pursuant to lock-up or standstill agreements entered into at the outset of the process (for more information in this respect, see Chapter 11);

•

the courts have been prepared to stay court proceedings taken by certain creditors to recover sums owing to them where a Scheme was being prepared to implement a restructuring of creditors’ debts and there was evidence that sufficient other creditors in the same class would support that Scheme (see BlueCrest Mercantile BV  v Vietnam Shipbuilding Industry Group [2013] EWHC 1146 (Comm));

•

the court has also been willing to stay judgment of a claim to allow the process for implementing a Plan to proceed where the entry conditions for a Plan have been met and a balancing of the interests of creditors as a whole and the private interests of the claimant favours the former (see Riverside CREM 3 Ltd v Virgin Active Health Clubs Ltd [2021] EWHC 746 (Ch)).

The terms of the Scheme or Plan will (if it is sanctioned) often then include a waiver of any breaches or events of default which were in existence prior to the Scheme or Restructuring Plan and which would otherwise have allowed creditors to enforce against the company. A Scheme or Plan indeed can be used primarily as a means to impose a moratorium on creditors while a company goes through the process of a restructuring. For example, Metinvest BV, a Dutch company, used two successive Schemes to achieve a standstill of its bondholders while it negotiated and documented the commercial terms of a restructuring (Re Metinvest BV [2016] EWHC 79 (Ch)). 235

8.3  CVAs, Schemes of Arrangement and Restructuring Plans Table 8.4 – The Scheme or Plan process

236

CVAs, Schemes of Arrangement and Restructuring Plans 8.3

8.3.1.10  What is the effect on supply contracts? The provisions of the IA 1986 which protect contracts for the supply of goods and services in an administration are discussed in detailed in Section 4.9. The provisions of s  233B IA  1986 apply equally from the date on which a court order is made under s  901C(1)  CA  2006 in relation to a company, ie  an order is made to convene one or more meetings to vote on a Restructuring Plan, save that for the purposes of s 233B(5) IA 1986 it is the directors of the company rather than the administrator who would need to consent to the termination of a contract. However, these provisions will not apply when an equivalent order is made to convene meetings to vote on a Scheme of Arrangement. The provisions of ss 233 and 233A IA 1986 do not apply either to a Scheme or a Plan.

8.3.2  The convening hearing 8.3.2.1  What issues are considered at this hearing? The court is empowered under ss  896(1) and 901C CA  2006 respectively on an application by one of those person described in Section 8.3.1.3 to order a meeting of creditors or class of creditors or member or class of members to be summoned. The courts issued a practice statement, Practice Statement (Companies: Schemes of Arrangement under Part 26 and Part 26A of the Companies Act 2006) on 26 June 2020 the ‘Practice Statement’), the aim of which is to enable certain issues to be identified and if appropriate resolved prior to the meetings being convened and held. This is designed, so far as possible, to avoid these issues being raised only at the sanction hearing. Accordingly, under para 6 of the Practice Statement, an applicant for a Scheme or Plan must draw to the attention of the court at the convening hearing, by evidence in support of the application or otherwise: •

any issues which might arise concerning the constitution of meetings of creditors and/or members to or which might otherwise affect the conduct of those meetings;

•

any issues as to the existence of the court’s jurisdiction to sanction the Scheme or Plan, such as whether an overseas company for which the Scheme or Plan has been proposed has a sufficient connection with England and Wales (see Section 12.6.6);

•

in relation to a Restructuring Plan, any issues relevant to the company’s eligibility as a result of its present or likely financial difficulties and ability of the Plan to resolve those difficulties (see Section 8.3.1.4);

•

in relation to a Restructuring Plan, if an application is to be made to seek an order that a class of creditors or members affected need not participate because they have no economic interest, any issues relevant to that application (see Section 8.3.4.3); and

•

any other issue not going to the merits or fairness of the Scheme or Plan, but which might lead the court to refuse to sanction it.

It is well-established that the function of the court at the convening hearing stage is emphatically not to consider the merits or fairness of a Scheme or Plan as these are questions for the sanction hearing. 237

8.3  CVAs, Schemes of Arrangement and Restructuring Plans Where any of the issues listed above is drawn to the attention of the court, the court will consider whether to determine that issue forthwith at the convening hearing or whether to give directions for resolution of that issue (see para 9 of the Practice Statement). Class composition will be a particular issue. In considering whether or not to make an order convening meetings, the court will specifically consider whether more than one meeting of creditors and/or members is required, and if so what is the appropriate composition (see para 10 of the Practice Statement). Class composition is discussed further in Section 8.3.3. While it is possible that the court will direct that the meetings be delayed, this is something which the court is likely to wish to avoid, particularly in a case where the company has financial difficulties which need to be resolved quickly. Thus, for example, the order convening the meetings may include an order giving anyone affected limited time in which to apply to vary or discharge that order with the meetings to take place in default of any such application within the time prescribed (see para 12 of the Practice Statement).

8.3.2.2  What notice of the convening hearing is required? Under para 7 of the Practice Statement, where an application for a Scheme or Plan gives rise to any of the issues raised in Section 8.3.2.1, unless there are good reasons for doing so, the applicant should prior to the convening hearing take all steps reasonably open to it to notify any person affected by the Scheme or Plan of the following matters: •

that the Scheme or Plan is being promoted;

•

the purpose of which the Scheme or Plan is designed to achieve and its effect;

•

the meetings of creditors and/or members which the applicant considers will be required and their composition;

•

any other matters that are to be addressed at the convening hearing, including the issues identified in Section 8.3.2.1;

•

the date and place fixed for the convening hearing;

•

that such persons are entitled to attend the convening and sanction hearings; and

•

how such persons may make further enquiries about the Scheme or Plan

This notification is often called the ‘practice statement notice’. It is the applicant’s responsibility to ensure that the practice statement notice is given in a concise form and is communicated to all persons affected in the manner which is most appropriate.

8.3.2.3  When is notice adequately given? Under para 8 of the Practice Statement, save where there are good reasons not to do so, the practice statement notice needs to be given in sufficient time to enable the persons affected to consider what is proposed, to take appropriate advice and, if so advised, to attend the convening hearing. Whether adequate notice is given depends on the circumstances. The evidence which the applicant gives at the convening 238

CVAs, Schemes of Arrangement and Restructuring Plans 8.3 hearing will need to explain the steps which it has taken to give the practice statement notice and indicate what responses, if any, it has had. An applicant might set out the information described in Section 8.3.2.2 in a letter and post and/or e-mail this to each person affected. The applicant might typically then advertise the fact that this letter was sent in a national newspaper and include a link to the text of the letter. Both the letter and the advertisement might also include a link to a website where more information is available. A company will often already have entered into detailed negotiations with some key creditors or members prior to launching a Scheme or Plan and may indeed have entered lock-up agreements with them in order to guarantee their support. The court has emphasised, however, that adequate notice still needs to be given to the remaining stakeholders (ColourOz Investment 2 LLC [2020] EWHC 1864 (Ch)). At the convening hearing for the Virgin Atlantic Plan, the court approved of the fact that trade creditors were not only sent a practice statement notice by letter but were also invited to a virtual webinar prior to the hearing explaining the process further (Re Virgin Atlantic Airways Limited [2020] EWHC 2191 (Ch)). In the ColourOz case, the court suggested that the appropriate notice period might be four weeks where there was no time pressure to complete the restructuring. However, the court indicated in the Virgin Atlantic case that a shorter time period, in this case three weeks, could be justified in a case of urgency. The practice statement notice gives creditors and members an opportunity to appear at the convening hearing and make representations. While creditors and members will still be entitled to appear and raise objections based on an issue outlined in Section 8.3.2.1 at the sanction hearing, they will need to show good reason why they did not do so earlier (see para 10 of the Practice Statement). If a company wishes to have the convening hearing held urgently this may be good reason not to send a practice statement notice. However, the company may have to accept that it will not raise any objection to any class composition or other issues outlined in Section 8.3.2.1 being raised at the sanction hearing. In effect, the protection provided by the practice statement notice may need to be waived.

8.3.3  Class composition issues 8.3.3.1  When will persons fall within the same class? The proper identification of the classes is fundamental to the successful adoption of a Scheme or Plan. In order for persons to fall within the same class, their rights must ‘not be so dissimilar for it to be impossible for them to consult together with a view to their common interest’ (Sovereign Life Assurance Co v Dodd [1892] 2 QB 573). It is necessary to consider both a person’s existing rights which are to be released or varied and the new rights and benefits which they are to receive under the Scheme or Plan (Re Hawk Insurance Company Ltd [2001] 2 BCLC 480). It is their legal rights, as opposed to commercial or other interests, which are relevant here, although these latter interests might be relevant to the ‘fairness’ test at the sanction stage. Therefore, creditors whose legal rights will be affected in the same way may be placed within a single class, even if some of them have other interests in relation to the company which might be affected by the adoption (or rejection) of the Scheme. 239

8.3  CVAs, Schemes of Arrangement and Restructuring Plans However, the court will take into accounts rights conferred on creditors which purport not to be conditional on the Scheme or Plan where such rights nonetheless cannot be described as independent in any realistic commercial sense (Re Codere Finance 2 (UK) Ltd [2020] EWHC 2441 (Ch)). Where a Scheme or Plan is being proposed as an alternative to liquidation or administration, it is appropriate to consider how creditors would have been treated in a liquidation or administration when determining classes (Marconi Corporation Plc and Marconi Plc [2003] EWHC 663 (Ch).) For example, unsecured creditors who would rank pari passu with each other in an insolvency procedure can be grouped together into a single class (Re Nostrum Oil & Gas plc [2022] EWHC 1646 (Ch)). As such, secured and unsecured creditors will almost inevitably comprise different classes. However, it may be necessary to create different classes, or further different classes to deal, for example, with secured creditors with differing priority rankings, subordinated creditors or contingent creditors. Creditors may nonetheless form a single class even if their legal rights are not identical.

8.3.3.2  How broad will the approach be for a Scheme? The court has emphasised its willingness to take a broad approach to the composition of classes, given that every class needs to vote in favour of a Scheme. To do otherwise risks giving unjustified veto rights to a minority group of creditors, such that the test for classes becomes an instrument of oppression by a minority (see the Hawk case). Various cases illustrate the courts’ approach to class composition in Scheme cases: •

In the Hawk case, an insurance company in run off was seeking to compromise claims under re-insurance contracts. The scheme offered these creditors payments at three different rates according to whether, for example, those creditors had yet paid out to the parties which they in turn had insured. The Court of Appeal held that all of these creditors could nonetheless fall within the same class. It made it clear that, when considering the composition of the classes, it was also necessary to ensure those whose rights were sufficiently similar to the rights of others that they could properly consult together should be required to do so, lest by ordering separate meetings the court gave a veto to a minority group over a Scheme which otherwise had widespread support.

• In Re Cape plc [2006] EWHC 1316 (Ch), the court declined to divide creditors with existing but unresolved asbestosis claims into a separate class from those who had not yet made a claim but may potentially do so in the future. • In Re Telewest Communications plc (No  1) [2005]  BCC  29, bondholders holding bonds denominated in sterling were held to form a single class with those holding bonds denominated in US dollars, despite the fact that the exchange rate mechanism chosen as part of the proposed Scheme was likely adversely to affect the former, due to currency fluctuations. The court observed that the sterling bondholders would still be able to address any questions of fairness at the sanction hearing. • In Cortefiel SA v MEP 11 Sarl [2012] EWHC 2998 (Ch), which concerned a group of senior lenders under a facility agreement, the court indicated that, rather than considering or comparing single rights, it should look at the various rights of each lender as a bundle, and consider and compare them in that context. 240

CVAs, Schemes of Arrangement and Restructuring Plans 8.3 • In Re APCOA  Parking Holdings GmbH [2014]  EWHC  3849 (Ch) the court found that turnover agreements entered into by creditors which consented to the Scheme, and pursuant to which those consenting creditors agreed to pay sums received by them from the company to other ‘super-senior’ creditors, did not alter the creditors’ rights against the company. Rather, they altered rights of the creditors in relation to each other, so did not create separate classes.

8.3.3.3  How broad will the approach be for a Plan? In a Plan case an applicant might have an incentive to create a greater number of classes in order to increase the chance of at least one class with a genuine economic interest voting in favour and thus facilitating a cross-class cram-down of other classes who vote against. However, in this respect: •

at the Virgin Atlantic Airways convening hearing the court considered whether it should adopt this same approach to class composition for a Plan and concluded that it should. However, it left open the question of whether the power to cram down a dissenting class could be activated by including within a Plan a class who would otherwise all have been prepared to enter into consensual arrangements to give effect to the same restructuring; • in Re Houst Limited [2022] EWHC 1941 (Ch), the court indicated that attempts artificially to create an in-the-money class in order to provide the anchor to activate the cross-class cram-down power should be resisted, particularly where such a class is not impaired by the Plan. Where, however, the in-themoney class is undoubtedly adversely affected by the company’s insolvency and is substantially impaired under the Plan, the mere fact that 100% of that class is prepared to support the Plan is no reason to prevent the cross-class cram-down power being exercised. It seems clear therefore that the court will seek to apply the same broad approach to class composition as for a Scheme and thus prevent the creation of an artificially large number of classes.

8.3.3.4  How do fee payments affect classes? The payment of various categories of fees to creditors and the potential for such fees to fracture a class of creditors is usually an area of specific attention at the convening hearing. The common categories of fees and their impact on class composition is summarised in Table 8.5. Table 8.5 – Fees and potential class issues Type of fee

Will fee place recipient into a different class?

Underwriting or backstop fee for new finance provided under the Scheme or Plan.

Generally no if such fees are in line with market rates for underwriting services and are not a disguised part of the consideration under the Scheme or Plan. Evidence that the underwriting fees are on arm’s length market terms may be needed.

Lockup fees payable to creditors who enter into an agreement to support the Plan or Scheme.

Generally no if lockup fees are offered to all creditors. Lockup fees are also usually kept relatively low (1–2% of the creditor’s debt claim) to minimise class and fairness issues.

241

8.3  CVAs, Schemes of Arrangement and Restructuring Plans Work fees payable to creditors who take a lead role in negotiating the restructuring.

As work fees are only available to certain creditors there is a greater risk that they will put recipients into a different class. To minimise this risk work fees should: (i) not be conditional on whether a Scheme or Plan becomes effective; and (ii) be relatively low (eg 1–2% of the creditors’ debt claim).

If creditors who are not entitled to the work fee are nonetheless supportive of the Scheme or Plan that may be evidence that the work fees do not have a material influence on the creditors’ consideration of the Scheme or Plan.

8.3.4  Creditors or members excluded from voting 8.3.4.1  When might persons be excluded? In addition, and in contrast to a CVA, the company need only call meetings of those creditors or members who will be affected by the Scheme or Plan. A  company may wish to exclude certain types of creditors or members from the Scheme or Plan altogether. For example, a Scheme of Plan might not seek to compromise the following: •

critical creditors who need to be left unaffected so that they will continue to deal with the company;

•

creditors who are owed relatively small amounts;

•

creditors or members with whom bilateral arrangements have been made; or

•

creditors or members with no economic interest in the company (‘out-of-themoney’ creditors).

The exclusion of certain creditors or members from the Scheme or Plan may be opposed by creditors who are being compromised by the Scheme or Plan. The court is, however, willing to accept the exclusion of creditors where: •

there is a commercially rational approach to the exclusion of creditors (e.g. it is not just being done to manipulate the composition of the classes) and

•

the explanatory statement provides sufficient information about why certain creditors were excluded.

(See SEA  Assets v PT  Garuda [2001]  EWCA  Civ 1696 in relation to a Scheme, followed at Virgin Atlantic Airways convening hearing in relation to a Plan.)

8.3.4.2  Persons with no economic interest in a Scheme Excluded creditors or members may also seek to challenge the Scheme on the basis that they should have been included within its scope and so able to vote on it. As a Scheme requires all classes who are convened to vote on the scheme to approve it by the requisite majorities, the inclusion of a hostile class could be fatal to the whole Scheme. 242

CVAs, Schemes of Arrangement and Restructuring Plans 8.3 However, the court is able to sanction a Scheme despite the opposition of members or creditors who have no real interest in the company’s assets (Re Tea Corporation [1904] 1 Ch 12). In MyTravel Group plc [2005] 2 BCLC 123, the court made it clear at first instance that a finding that a creditor had no economic interest was a serious one which needed to be considered carefully. The court was nonetheless entitled to look at the reality, rather than speculate as to what value might theoretically be returned to the creditors concerned following a successful restructuring. In the MyTravel case, the court was satisfied that it was appropriate to view insolvent liquidation as the realistic alternative to the proposed Scheme and that on the evidence it was clear that the creditors concerned would receive nothing in that liquidation. (The decision was appealed, but the Court of Appeal concluded that it had no need to reconsider the economic interest point.) Similar reasoning has since been applied in, for example, Re McCarthy and Stone plc [2009] EWHC 1116 (Ch) and in Re Bluebrook Ltd [2009] EWHC 2114 (Ch) (the ‘IMO Car Wash’ case). This has important consequences for the restructuring of an insolvent company. Lower-ranking classes of creditors who have no real economic interest may, for example, be excluded entirely from a Scheme which contemplates the subsequent transfer of the company’s assets to a new company. This will not affect their rights as creditors, but will leave them as creditors only of the empty shell of the old company, so their rights are likely to have little remaining value.

8.3.4.3  Persons with no economic interest in a Plan The case law on a company’s ability to exclude creditors from a Scheme should also apply to a Plan. However, whereas creditors excluded from voting on a Scheme are not bound by the Scheme, a Plan can go further. Under s 901C(4) CA 2006, the court can order that a class of creditors or members be excluded from voting if no member of that class has a genuine economic interest in the company. While s 901(4) does not expressly say that that class will still be bound by the Plan when such an order is made, the court has indicated that this would be the effect of such an order (see Re Smile Telecoms Holdings Limited [2022] EWHC 387 (Ch) at 249). When deciding whether to make such an order the court will want to ensure any valuation evidence supporting the view that the excluded creditors have no genuine economic interest is robust and that sufficient information and notice is given to the excluded creditors so that they have an adequate opportunity to oppose the making of the order at the convening hearing.

8.3.5  Giving notice of the meetings 8.3.5.1  By what method must notice be given? The CA 2006 anticipates that the notices summoning the meeting(s) of the various classes will either be sent to the creditors and members concerned or given by advertisement. This potentially leaves scope to send the notices by post, by e-mail or both, depending on how the company would ordinarily communicate with its creditors or members. 243

8.3  CVAs, Schemes of Arrangement and Restructuring Plans The evidence for the convening hearing should duly describe how it is proposed that members and/or creditors are to be given notice of any meeting (see para 13 of the Practice Statement).

8.3.5.2  What documents will be supplied? Sections 897(1) and 901D(1)  CA  2006 respectively provide that every notice summoning a meeting to consider a Scheme or Plan: •

that is sent to a creditor or member must be accompanied by an ‘explanatory statement’; or

•

that is given by advertisement must either include an explanatory statement or state where or how the creditors or members entitled to attend the meeting may obtain copies of such a statement. In the latter case every such creditor or member is entitled, on making an application in the manner indicated in the notice, to be provided by the company with a copy of the explanatory statement free of charge (ss 897(4) and 901D(4) CA 2006). It would be envisaged that, in practice, the advertisement would also contain a link to a website from which creditors or members might download a copy.

As such, the full pack would ordinarily include: •

notice of the meeting to which the relevant class is invited;

•

the Scheme or Plan itself;

•

an explanatory statement; and

•

a proxy form.

8.3.5.3  What must the explanatory statement contain? The legislation says relatively little in this regard. Sections 897 and 901D CA 2006 respectively provide only that the explanatory statement must: •

explain the effect of the compromise or arrangement;

•

in particular, state any material interests of the directors of the company (whether as directors or as members or creditors of the company or otherwise) and the effect on those interests of the compromise or arrangement in so far as it is different from the effect on the like interests of other persons; and

•

where the compromise or arrangement affects the rights of debenture holders of the company, give a like explanation as respects the trustees of any deed for securing the issue of the debentures as it is required to give in respect of the company’s directors.

Sections 898 and 901E(1) CA 2006 respectively provide that it is the duty of any director of the company, or of any trustee for its debenture holders, to give notice to the company of such matters relating to that director or trustee as may be necessary for the above purposes. Paragraph 14 of the Practice Statement adds that any explanatory statement should be in a form and style appropriate to the circumstances of the case, including the nature of the member and/or creditor constituency and should be as concise as 244

CVAs, Schemes of Arrangement and Restructuring Plans 8.3 the circumstances permit. In addition to complying with the requirements of the CA 2006, it must: •

explain the commercial impact of the Scheme or Plan; and

•

provide members and/or creditors with such information as is reasonably necessary to enable them to make an informed decision as to whether the Restructuring Plan is in their interests, and on how to vote on it.

Where a document is incorporated into the explanatory statement by reference, readers should be directed to the material parts of the document. Paragraph  15 of the Practice Statement indicates that the court will consider the adequacy of the explanatory statement at the convening hearing and may refuse to make an order summoning the meetings if it considers that the explanatory statement is not in an appropriate form. However, it emphasises that the court will not approve the explanatory statement and that it will therefore remain open to any person affected by the Scheme or Plan to raise issues as to its adequacy at the sanction hearing. In Re Sunbird Business Services Limited [2020] EWHC 2493 (Ch) the court declined to sanction a Scheme on this basis. There is a potential difficulty in including business-sensitive information with an explanatory statement. However, the court addressed this at the Virgin Atlantic Airways convening hearing by holding that creditors who particularly asked to see this extra information might receive it if they first signed a confidentiality agreement.

8.3.5.4  What if interests in a debt are held indirectly? One particular issue that may arise is where interests in the applicant’s debt are held indirectly. This may occur if, for example, a single nominee holds the legal title to a series of notes for the various beneficial owners. The fact that a person holds the beneficial interest in a note will not be sufficient in itself to make that person a creditor of the company in their own right. They may only be able to vote through the nominee. Paragraph 13 of the Practice Statement provides that, if it is proposed that the votes to be cast at the meeting should by some method reflect the views of the persons holding the indirect interests, the evidence at the convening hearing should set out the applicant’s proposals in that respect and any facts justifying those proposals. In the above example, the applicant may propose a mechanism where the persons holding the beneficial interests are still given details of the Scheme or Plan and notice of the relevant meeting, and are able then to instruct the nominee how they wish the nominee to vote in respect of the notes in which they hold their beneficial interest.

8.3.6  The meetings 8.3.6.1  What are the voting thresholds for a Scheme? At each meeting in relation to a Scheme of Arrangement, the persons present formally consider the Scheme and vote whether to approve it. In order for any class of creditors or members to approve the Scheme: •

a majority in number; 245

8.3  CVAs, Schemes of Arrangement and Restructuring Plans •

representing at least 75% in value;

of those persons present and voting at the meeting of that class, either in person or by proxy, must vote in favour (s 899(1) CA 2006. A court will only sanction a Scheme if every class has approved it. Creditors or members who do not engage with the process at all, or who are present but abstain from voting, do not count when ascertaining whether at least 75% in value have voted in favour. Like a CVA, a Scheme is therefore a useful tool for binding uninterested creditors as well as dissenting creditors, although as discussed below in Section 8.3.6.4 the turnout level will not be completely ignored. The requirement for a majority in number as well as by value is to help to ensure that a low number of large creditors or members holding the majority of the value cannot oppress the smaller members or creditors. This begs the question of whether a creditor or member might defeat a Scheme by splitting its debt between a number of different vehicles, but the Dee Valley Group Plc case (discussed in Section 8.3.7) suggests that such a strategy would not succeed.

8.3.6.2  What are the voting thresholds for a Plan? In order for any class of creditors or members to approve a Restructuring Plan, at least 75% in value of those persons present and voting at the meeting of that class, either in person or by proxy, must vote in favour (s 901F(1) CA 2006). Unlike a Scheme, there is no requirement for a majority in number to approve the Plan. As discussed in Section 8.3.7, it is also possible for a Plan to be sanctioned even if not every class approved it.

8.3.6.3  Is a physical meeting required? In order to hold a physical meeting, the applicant would need to find a venue large enough to house the number of stakeholders who they believe may potentially attend the meeting even though in reality the vast majority of stakeholders are likely to choose to vote via proxies and only a few will wish physically to attend. This issue has already been identified and addressed for creditor meetings held as part of insolvency procedures governed by the IA 1986, such as CVAs. The default option for those procedures is to avoid physical meetings unless a specified threshold of creditors so request. However, there are no corresponding requirements for procedures governed by the CA 2006, such as Schemes and Plans. Applicants remain free to propose either a physical or a virtual meeting, although virtual meetings are now becoming the route of choice due to their flexibility. The fact that not all stakeholders possess the technology to access a video-link will not necessarily prove a barrier to a virtual meeting. In Re Castle Trust Direct plc [2020]  EWHC  969 (Ch) the court emphasised that the purpose of the ‘meeting’ here was to allow creditors or members to come together to consult with each other, should they choose to do so, in order to make a collective decision. This was capable of being achieved via telephonic communication where those who were participating were able to hear and ask questions and express opinions in circumstances in which everyone else who was present was also able to hear and ask questions and express opinions. 246

CVAs, Schemes of Arrangement and Restructuring Plans 8.3

8.3.6.4  Is a minimum turnout required? As noted above, for voting purposes it is irrelevant whether creditors or members vote in person or by proxy. Similarly, even if a significant number of creditors or members abstain or choose not to engage with the process at all this will not affect the vote. However: •

at the sanction hearing, the court will need also look at whether the class concerned was properly represented at each meeting (see Section 3.9). In practice the applicant will therefore wish to ensure that a reasonable number of stakeholders do cast votes at the meeting; and

•

sufficient attendees will need to be present in person for a ‘meeting’ to have occurred. If a class consists of only one person, they can still hold a meeting. If only one person from a larger class attends, however, it is doubtful whether a ‘meeting’ will validly have been held (Re Altitude Scaffolding Ltd [2006]  EWHC  1401 (Ch)). In practice, for a larger class, the applicant will therefore wish to ensure that the meeting is not attended only by a chairman who has been appointed the proxy of all of stakeholders choosing to vote but also by one or more stakeholders in person or through a different proxy.

8.3.7  The sanction hearing 8.3.7.1  The court’s discretion to sanction a Scheme Sections 899  CA  2006 provides that the court ‘may’ sanction a Scheme if it has been approved by the creditors or classes of creditors and/or members or classes of members (as the case may be) at their respective meetings. In other words, even where every class has voted to approve the Scheme, this does not mean that the court will automatically sanction the Scheme. The court still has a discretion as to whether or not to do so, and in exercising this discretion it will consider four further ‘fairness’ and procedural issues: •

whether the statutory provisions concerning the convening of the meetings have been complied with;

•

whether the classes were fairly represented at the meetings;

•

whether the proposal itself was fair; and

•

whether there was a ‘blot’ or defect in the Scheme that would make it unlawful or in any way inoperable.

Finally, where the Scheme is proposed by a foreign company, the court will also need to consider any jurisdictional issues. This is discussed further in Chapter 12.

8.3.7.2  Were the meetings properly convened? The court may consider the Scheme to be unfair if some of the procedural requirements, such as those relating to the circulation of information have not been complied with. It will consider among other things whether the explanatory statement adequately provided the recipients with all of the information they reasonably required to decide how to vote. 247

8.3  CVAs, Schemes of Arrangement and Restructuring Plans

8.3.7.3  Were the classes fairly represented? The court will be concerned to ensure that each class was fairly represented by those attending the relevant meeting, and the majority in every class is acting bona fide and not attempting to promote an interest which is in fact adverse to the class they claim to represent. In Re Dee Valley Group Plc [2017] EWHC 184 (Ch), a member who had split his shareholding by way of transfers to a variety of other individuals in order to form a majority by number in his particular class fell foul of this principle, as the court found that the shareholding had been split for the primary purpose of defeating the Scheme. If the turnout at the meeting was low, the court may wish to ensure that those attending and voting nonetheless represented a significant proportion of their class by value. The court will consider the level of turnout that the meetings both in absolute number of attendees and the proportion that attendees bear to the size of the class as a whole. A  low turnout is not by itself sufficient to cause the court to decline sanction. In Re Instant Cash Loans Limited [2019]  EWHC  2795 (Ch) a Scheme was sanctioned despite turnout at the creditors’ meeting being 4% of the potential creditors. The court will consider the way the meetings were notified or advertised and any explanations that there may be for the level of actual participation. The level of previous engagement with the creditors may also be relevant.

8.3.7.4  Was the proposal itself ‘fair’? Generally, this imposes a ‘rationality test’ which asks the court to be satisfied that ‘the scheme is a fair scheme which a creditor could reasonably approve’ (Re Noble Group Limited [2018] EWHC 3092 (Ch)). The court may still reject the Scheme at this stage if, for example, it considers that it unfairly prejudices one or more of the minority creditors who opposed it. The above test does not, however, require the court to superimpose its own view of whether the proposal is beneficial to the creditors as the court should not be ‘concerned to decide whether the scheme is the only fair scheme or even the “best” scheme’ (Re Noble Group Limited at para 17). The courts recognise that a creditor acting on sufficient information and given sufficient time to consider it will normally be the best judge of his or her own commercial interests (Re English, Scottish and Australian Chartered Bank [1893] 3 Ch 385). Accordingly, where the creditors have voted overwhelmingly in favour of a Scheme the court will generally be slow to depart from the creditors’ decision. However, if the explanatory statement circulated by the company fails to adequately explain (taking into account the sophistication of the creditors) the benefits and losses of the Scheme, its effect on all stakeholders and realistic alternatives the court may consider that the creditors were not making a fully informed decision. In this circumstance the court will not limit itself to the ‘rationality test’ and may give a wider consideration of whether the Scheme is fair including in comparison to realistic alternatives such as a different Scheme on more favourable terms for the creditors (Re ALL Scheme Limited [2021] EWHC 1401 (Ch)).

8.3.7.5  Is there any ‘blot’ or defect? The court will not sanction a Scheme where it would be acting in vain. The court will want to be satisfied that the there is no technical flaw which means that the Scheme 248

CVAs, Schemes of Arrangement and Restructuring Plans 8.3 does not work on its terms. The court will also want to avoid sanctioning a Scheme that causes a breach of a mandatory provision of law.

8.3.7.6  The court’s discretion to sanction a Plan Section 901F CA 2006 provides that the court ‘may’ sanction a Plan if it has been approved by the creditors or classes of creditors and/or members or classes of members (as the case may be) at their respective meetings. This section is subject to s 901G CA 2006, whereby even where one or more classes have not approved of the Plan, the court will duly need to consider whether still to sanction the Restructuring Plan by permitting ‘cross-class cram-down’. However, the explanatory notes to CIGA 2020 state: ‘As is the case with Part 26 schemes of arrangement, the court will always have absolute discretion over whether to sanction a Restructuring Plan. For example, even if the conditions of cross-class cram-down are met, the court may refuse to sanction a Restructuring Plan on the basis that it is not just and equitable.’ In Re Virgin Atlantic Airways Limited [2020]  EWHC  2376 (Ch), the first case in which the court was required to sanction a Plan, all classes had voted in favour and the court therefore exercised its discretion in the same way that it would have done for a Scheme. Where the court has determined that Conditions A  and B  for a cross-class cramdown are met and it is required to exercise its discretion, however, it must consider additional factors when doing so. These are discussed in Section 8.3.7.7. The court needs to be more willing to depart from the decision of the creditors as, by its very nature, the power to be exercised contemplates that the court can override the wishes of a class which has voted against the Plan (Re DeepOcean UK Limited [2021] EWHC 138 (Ch)).

8.3.7.7  Cross-class cram-down The conditions that need to be met for a cross-class cram-down are: •

Condition A: the court is satisfied that none of the members of the dissenting class would be any worse off than they would be in the ‘relevant alternative’ (s 901G(3) CA 2006);

•

Condition B: the Plan has been approved by the requisite majority of 75% by value by one class of creditors or members who would receive a payment under the Plan or would have a genuine economic interest in the company in the event of the ‘relevant alternative’ (s 901G(5) CA 2006); and

•

The court has exercised its discretion to permit the cross-class cram-down.

The relevant alternative is whatever the court considers would be the most likely outcome for the company if the Plan was not sanctioned (s 901G(4) CA 2006). The applicants will need to provide evidence as to what the relevant alternative might be. Often this will be an insolvency process such as an insolvent liquidation or an administration. However, the court will not automatically presume this to be the case. 249

8.3  CVAs, Schemes of Arrangement and Restructuring Plans In Re Hurricane Energy PLC  [2021]  EWHC  1759 (Ch) the court declined to use its cross-class cram-down powers to sanction a Plan, in part because it was not convinced that the relevant alternative was an insolvent liquidation in a year’s time when certain bonds fell due for payment. It found the company was likely to continue to trade profitably in the short to medium term. There were a number of possible options that the company could take before the bonds matured that could provide the members (who had rejected the Plan) with a better return than significant dilution of the equity proposed by the Plan. In the Hurricane Energy case, the court seemed to suggest that the dissenting stakeholder(s) need demonstrate only that there was a realistic prospect of some other financial outcome better than that offered by the Plan. However, in Re Amicus Finance Plc (in administration) [2021] EWHC 3036 (Ch) the court emphasised that this did not fully state the burden of proof. If a dissenting creditor suggests that there is an alternative scenario in which they would be better off, the question then is whether the propounder of the Plan can refute that challenge and satisfy the court on the balance of probabilities that the dissentient creditor would be no worse off under the Plan. However, the more distant the time at which (or the longer the period over which) the events in question fall to be examined and assessed the more difficult it will be to satisfy the court. Where exercising its discretion, the court will take a similar approach to CVAs and look at horizontal fairness (the treatment of the dissenting class relative to similarly positioned stakeholders) as well as vertical fairness (the outcome for the dissenting class in the relevant alternative). The court will consider how the Plan allocates the value and benefits created or preserved by the Plan. These values and benefits are known as the ‘restructuring surplus’, a term explained further by Dr Riz Mokal in ‘The Court’s Discretion in Relation to the Part 26A Cram Down (2021) 36(1) Journal of International Banking and Financial Law (January 2021)). The court will generally place little weight on the view of a dissenting class which is ‘out-of-the-money’, ie where the relevant stakeholders would not receive any return in an insolvent liquidation. The court will be more willing to accept an allocation of the restructuring surplus approved by the in-the-money creditors. In Re Virgin Active Holdings Limited [2021] EWHC 1246 (Ch) the court approved a cross-class cram-down of landlords even though members in the company retained their equity interest. The court considered that as it was in-the-money creditors who should decide the allocation of the restructuring surplus then they could choose to share it with the members, despite the fact that those members would have ranked below the landlords in an insolvent liquidation or administration. The shareholders also were willing to inject further monies by way of loans and equity if the Plan were sanctioned. The paper by Dr Mokel referred to above and a paper entitled ‘Judicial Discretion in Part 26A Restructuring Plan Procedures’ by Professor Sarah Paterson, available at https://papers.ssrn.com, provide an excellent further analysis of the discretion process. The facts of the Virgin Active case are set out in the box below and demonstrate the usefulness of cross-class cram-down. The Virgin Active proposal could not have been implemented as a Scheme of Arrangement due to its rejection by all but one class of landlords and by the general property creditors. A CVA would not have been able to deal with the secured lenders under the same process. In order to win sufficient votes from the landlords, the compromises implemented by a CVA would almost certainly have had to be shallower and more landlord friendly. 250

CVAs, Schemes of Arrangement and Restructuring Plans 8.3 Re Virgin Active Holdings Limited [2021] EWHC 1246 (Ch) Virgin Active Holdings Limited and two of its sister companies (the ‘Plan Companies’) operated health clubs. Their businesses had been significantly impacted by the lockdowns imposed in response to the Covid-19 pandemic. The Plan Companies proposed interdependent restructuring plans to implement the following restructuring: •

their liabilities to their secured lenders would not be reduced, but the maturity of their loan facilities would be extended by three years;

•

the Plan Companies’ landlords were divided into five classes according to their importance to the Plan Companies. Class A  landlords were left largely uncompromised. Class B landlords had rent arrears owed to them compromised. Class C landlords had both rent arrears released and a 50% rent reduction during a rent concession period. Class D and E landlords had all liabilities owed to them released. All landlords had the right to terminate their lease in exchange for payment of 120% of the estimated return that they would receive in an administration of the Plan Companies (the ‘Restructuring Plan Return’); and

•

creditors of the Plan Companies’ other property-related liabilities (such as previous landlords with the benefit of an authorised guarantee agreement) had their claims released in exchange for payment of the Restructuring Plan Return.

The members and their affiliates were willing to capitalise or waive existing debts due to them and to introduce new monies in the event that the restructuring plans became effective. The restructuring plans were approved by the secured lenders and the Class A landlords only. Each other class of landlord and the general property creditors rejected them. The court therefore had to consider whether to apply a cross-class cram-down. There was no dispute that Condition A was satisfied as the secured lenders and the Class A landlords had a genuine economic interest in the Plan Companies. The court held that Condition B, ie that no member of a dissenting class be any worse off that in the event of the relevant alternative, was also satisfied. The most likely alternative here was a trading administration and an accelerated sale of part of the Plan Companies’ businesses. The Restructuring Plan Return was more than was estimated to be paid to the dissenting creditors in an administration and would also be paid sooner than a distribution by administrators. Certain landlords did challenge the valuations provided by the Plan Companies. However, the court dismissed the landlords’ arguments. The court stated that it did not want the usefulness of the restructuring plan to be undermined by lengthy valuation disputes. In the circumstances the court was satisfied with the use of desktop valuations rather than market testing, particularly in light of the landlords’ failure to provide their own competing valuations. The court was also willing to exercise its discretion in favour of a sanction with a cross-class cram-down. As the court had found that the dissenting landlords and general property creditors would be out-of-the-money in the relevant alternative the court placed little weight on their views. More weight was placed on the 251

8.3  CVAs, Schemes of Arrangement and Restructuring Plans approval given by the in-the-money secured lenders, including the secured lenders’ implied willingness to let the members of the Plan Companies retain their equity interest despite creditor landlords being compromised.

8.3.8  What happens once sanction is given? 8.3.8.1  When does the Scheme or Plan become effective? In practice, the terms of the Scheme or Plan will stipulate when it becomes effective. However, for a Scheme s 899(4) CA 2006 provides that the court’s order will have no effect until a copy of it has been delivered to the registrar of companies. Similarly, for a Plan s 901F(6) CA 2006 provides that the court’s order will have no effect until a copy of it has been: •

in the case of an overseas company that is not required to register particulars under s 1046 CA 2006, published in the Gazette; or

•

in any other case, delivered to the registrar of companies.

The registrar has a practice of refusing to register an order until HMRC has confirmed that the relevant Scheme or Plan does not carry any liability for stamp duty. However, given that the triggers described above occur on delivery rather than registration, this ought not to delay the Scheme or Plan becoming effective. The terms of most Restructuring Plans are therefore likely to stipulate that the plan will become effective on the later of: •

the date when the relevant requirements are satisfied; and

•

the date on which the last of any other conditions precedent to the plan becoming effective is satisfied (see Section 8.3.8.2).

8.3.8.2  Sanctioning a conditional Scheme or Plan It is possible for the court to sanction a Scheme or Plan which only becomes effective once the relevant conditions are fulfilled. Such conditions might include, for example, the implementation of other aspects of a restructuring or the grant of a regulatory approval which are conditional in turn on the Scheme or Plan first having been sanctioned. In Re Nielsen Holdings Plc [2015] EWHC 2966 (Ch), the court held that in order for it to sanction a conditional Scheme: •

the court must be provided with sound grounds for thinking the condition will be satisfied;

•

there must be no known obstacle to completion and that the scheme addresses the possibility of non‑satisfaction of the conditions; and

•

the condition is not such as to confer some separate decision‑making power on a third party whether to implement the transaction or not.

This test was endorsed in relation to Plans in Re Smile Telecoms Holdings Limited [2021] EWHC 685 (Ch). 252

Chapter 9

Secured creditors 9.1 INTRODUCTION Chapter 2 considered the circumstances in which a creditor will hold security and the priority status which such a secured creditor will enjoy on a liquidation or administration. This chapter considers the ability of a secured creditor to enforce its security in more detail. For the purposes of this chapter, a secured creditor will be taken to mean a creditor holding either a mortgage or a charge. This chapter will focus to a large extent on receivership, and will expand on the overview of this process given in Chapter  1. In addition, it discusses briefly the ways in which the Financial Collateral Arrangements (No  2) Regulations 2003 (SI 2003/3226) might improve a secured creditor’s position in certain circumstances.

9.2  HOW MIGHT A SECURED CREDITOR ENFORCE ITS SECURITY? 9.2.1  What are the remedies available? 9.2.1.1 Overview A security document granted by the company by way of a deed will typically give the secured creditor four main remedies. These are: •

a power to take possession of the secured property;

•

a power of sale;

•

a right of foreclosure, subject to an order of the court; or

•

a power to appoint a receiver to manage and/or sell the secured property.

9.2.1.2  Power to take possession If a secured creditor takes possession, it becomes accountable to the company for what it might have received, but for its own negligence or wilful default (White v City of London Brewery Co (1889) 42 ChD 237). A mortgagee in possession of land may also now risk liability for environmental damage and clean-up costs. A mortgagee might well therefore choose to take possession directly only as a precursor to the exercise of a power of sale.

9.2.1.3  Power of sale A secured creditor has no obligation to exercise its power of sale. If it does choose to exercise this power, it is not obliged to exercise it in the best interests of the company 253

9.2  Secured creditors rather than its own best interests and so, for example, is free to sell at a time of its own choosing (Cuckmere Brick Co v Mutual Finance [1971] 2 All ER 633). However, it is obliged to exercise this power in good faith for the sole purpose of recovering its debt. Perhaps more significantly, it will also have a duty to take reasonable care to obtain the best price which the circumstances of the case permit on the sale of an asset. The court reviewed the duties of a secured creditor exercising its power of sale directly in Silven Properties Ltd v Royal Bank of Scotland plc [2004] 4 All ER 484 and noted the similarity to the duties of a receiver selling property. (These are discussed more fully in Section 9.7.2.2 and apply equally here.) In Michael v Miller [2004]  EWCA  Civ 282, the Court of Appeal also noted that, just as a valuer will not breach their duty if their valuation falls within an acceptable margin of error, a secured creditor would not breach its duty if it exercised its judgment reasonably. To the extent that that judgment involves assessing the market value of the property, it would have acted reasonably if its assessment falls within an acceptable margin of error. It will only therefore be liable if its conduct is plainly on the wrong side of the line.

9.2.1.4  Right to foreclosure Foreclosure is a process whereby the secured creditor takes outright ownership of the secured property in satisfaction of the debt. However, it requires an order of the court. The court is only likely to make such an order if the debt exceeds the value of the secured property. In addition, before the court makes a final order it will usually give the company six months to repay the debt and redeem the security. Once the final order has been made, the creditor will no longer be able to sue either the company or any guarantor in respect of any unpaid balance of the debt.

9.2.1.5  Power to appoint a receiver (or administrator) Given the duties of, and other disadvantages to, the secured creditor in exercising the powers described above, a secured creditor is in practice most likely to appoint a receiver (or conceivably an administrator if they are entitled to do so) rather than to exercise any of its other remedies. This is because, as discussed further in Section 9.5, a receiver will normally remain independent of the secured creditor and the secured creditor will not therefore be liable for the receiver’s defaults.

9.2.2  Can the secured creditor buy the secured property itself? As discussed in Section 9.2.1.4, the secured creditor is entitled to acquire outright ownership of the secured property by foreclosure, but this process is generally unattractive. A  secured creditor is not entitled to sell the secured asset to itself, or to another person which is simply its trustee or nominee. Similarly, it cannot appoint a receiver or administrator to achieve the same result. However, this is easily surmountable, since the law does not prevent the secured creditor from selling to another legal entity of which it is a shareholder (Farrar v Farrars Ltd (1888) 40 ChD 395). 254

Secured creditors 9.3 As a result, it is not unusual for a secured creditor to form a new subsidiary to act as buyer. Where some of the secured property consists of floating charge assets, the buyer may still need to pay sufficient cash to the company to cover preferential debts and any prescribed part. However, the bulk of the consideration for the sale is likely to be the release of the company from the secured debt (this is often termed a ‘credit bid’). The secured creditor, or any receiver (or administrator) must of course still comply with their other duties on any such sale. Where the secured creditor holds a large beneficial interest in the buyer, the onus may shift onto it to show that it has done so (Tse Kwong Lam v Wong Chit Sen [1983] 1 WLR 1349). However, from the secured creditor’s perspective, the independence of a receiver is a particular advantage here. If a receiver is found to have failed to obtain the best price reasonably obtainable, they may well be ordered to compensate the company out of their own resources. However, it is highly unlikely that, in the absence of bad faith, the sale will be set aside or, provided the secured creditor has allowed the receiver to retain their independence, the secured creditor will be required to contribute to any shortfall in the purchase price. These duties were usefully re-examined by the Court of Appeal in PK Airfinance Sarl v Alpstream AG [2015] EWCA Civ 1318. That case also reconfirmed that the secured creditor owes its duty of care to those with a direct interest in the secured assets, not to an individual unsecured creditor who has suffered a loss as a result.

9.3  APPOINTING A RECEIVER OR ADMINISTRATOR 9.3.1  What are the secured creditor’s options? The secured creditor will need to decide whether it wishes to appoint an administrative receiver, a non-administrative receiver or an administrator. Table 9.1 compares the main advantages of receivership with those of administration from the secured creditor’s perspective. Table 9.1 – Receivership versus administration Advantages of receivership •

A receiver owes their primary duty to their appointor. An administrator owes duties to the creditors generally, and the creditors are able to exercise greater control over the process.

•

A non-administrative receiver need not be a qualified insolvency practitioner (a secured creditor could, for example, appoint a surveyor as a receiver of a freehold property).

•

The administration expense regime is less favourable. In particular, both capital gains tax (on the realisation of an asset) and rent and non-domestic business rates (where the company occupies the property) will be expenses of an administration.

•

The costs of receivership generally are likely to be lower, particularly if enforcement only requires a receiver to be appointed over a single secured asset.

•

Administration will not normally be available unless the company’s COMI is in the UK (see Chapter 12).

Advantages of administration •

Administration offers a moratorium.

•

The appointment of an administrator is likely to be required to run and/or sell any business (unless the secured creditor is able to appoint an administrative receiver).

•

Administration is likely to be the better-recognised process internationally if the company has assets in other jurisdictions, provided the company’s COMI is in the UK (see Chapter 12).

255

9.3  Secured creditors •

An administrator has the power to force management co-operation, to deal with employees and/or to require that records are delivered up.

•

An administrator has full control over the company’s VAT affairs, so is able to recover VAT without requiring the co-operation of other persons.

•

Administration offers certain protections in relation to contracts for the supply of goods and services.

9.3.1.1  Administrative receivers Under s 29 IA 1986, an administrative receiver is defined as a receiver or manager: •

of the whole (or substantially the whole) of the company’s property;

•

appointed by or on behalf of the holders of any debentures of the company secured by a charge which, as created, was a floating charge, or by such a charge and one or more other securities.

(It also includes a person who would be such a receiver or manager but for the appointment of some other person as non-administrative receiver of part of a company’s property.) An administrative receiver must be a qualified insolvency practitioner (s 230 IA 1986). The exact meaning of ‘substantially the whole’ has never been clarified by the English courts, and secured creditors therefore need to form their own view in this regard. However, it is clear that the security must contain a floating charge. If it does, a receiver appointed under this security can still be an administrative receiver notwithstanding that the vast majority of the company’s assets are in practice fixed charge assets (see Re Croftbell [1990] BCC 781). Conversely, however, a receiver appointed under a fixed charge only will not be an administrative receiver, even if the asset over which they are appointed is the sole asset of the company (Meadrealm Ltd v Transcontinental Golf Construction (1991) unreported, but noted by Marks in (1993) 6 Insolvency Intelligence 41). In many cases a secured creditor will be unable to appoint an administrative receiver, for the reasons explained in Section 9.3.2.

9.3.1.2  Non-administrative receivers The restrictions which prevent the secured creditor appointing an administrative receiver do not prevent it appointing a receiver over fixed charge assets only, or possibly over a more limited range of fixed and floating charge assets. Such a receiver might be appointed to manage and/or sell a freehold property or the company’s shareholding in a subsidiary, for example. Unlike an administrative receiver, they need not be a qualified insolvency practitioner. In addition, they will have fewer other duties than will an administrative receiver or an administrator. However, it is unlikely that they could be appointed over sufficient assets to allow them to sell the company’s entire business.

9.3.1.3 Administrators Alternatively, a secured creditor who is a qualifying floating charge holder (or ‘QFCH’) may appoint an administrator if it wishes to enforce over all of the assets of 256

Secured creditors 9.3 the company, for example to promote a sale of the company’s business. The proposed administrator will need to be satisfied that they will be able to fulfil the purpose of administration which is a concern a receiver does not have, although in practice this should seldom pose a difficulty. The meaning of the term ‘QFCH’ and the route by which a QFCH may appoint an administrator are discussed in Chapter 4. This chapter will therefore discuss considerations involved in appointing an administrator only where they parallel those involved in appointing a receiver.

9.3.1.4  Court-appointed receivers The court also has the power to appoint a receiver of a company’s assets. It seems unlikely, however, that a secured creditor would wish to apply to the court where it already has the power to appoint a receiver out of court under the terms of its security. A secured creditor is likely only to seek the assistance of the court where its security is in some way inadequate. Historically secured creditors have sought such an appointment where, for example, they were concerned that their security was in jeopardy but the right to appoint had not yet arisen. Further discussion of courtappointed receivers is beyond the scope of this book.

9.3.2  Can the secured creditor appoint an administrative receiver? 9.3.2.1  What limitations apply to their ability to do so? Under 72A IA 1986, a secured creditor will only be able to appoint an administrative receiver if: •

its security was taken prior to 15 September 2003; or

•

one of the exceptions set out in ss 72B–72GA IA 1986 (usually referred to as the ‘City Exceptions’) applies.

9.3.2.2  What are the City Exceptions? Table 9.2 lists the existing City Exceptions. They apply to specific financing structures or borrowers where the continued availability of administrative receivership as a remedy is thought to be necessary to ensure that that lending will continue to be available on the favourable terms associated with those particular structures. The exceptions contained in ss 72C–72E are worth discussing further here, as they may be capable of more general application. They allow the secured creditor to appoint an administrative receiver in respect of a project company for certain specified types of project where the project includes step-in rights. For these purposes: •

a company is a ‘project company’ if it holds property for the purpose of the project or has sole or principal responsibility under an agreement for carrying out all or part of the project or is one of a number of companies which together carry out the project or provides finance to enable the project to be carried out. A holding company of such a company will also fall within the definition. However, a company will not be a project company if it also performs other functions not related to the project (para 7 Sch 2A IA 1986); and

•

a project has ‘step-in rights’ if a person who provides finance to a project has a conditional entitlement under an agreement to assume sole or principal 257

9.3  Secured creditors responsibility for carrying out all or part of the project or to make arrangements for the carrying out of all or part of the project (para 6 Sch 2A IA 1986). The project finance exception in s 72E IA 1986 was considered in Cabvision Ltd v Feetum [2006] BCC 340, where the court gave its views on the meaning of a ‘project’ and the question of when a company might be ‘expected to incur’ a debt of at least £50 million. The court also made it clear in this case that a contractual right to appoint an administrative receiver was not itself a step-in right. Table 9.2 – The ‘City Exceptions’ A secured creditor remains entitled to appoint an administrative receiver in the following circumstances: 1. Capital market arrangements (s 72B IA 1986) Pursuant to an agreement which is, or forms part of, a ‘capital market arrangement’ (as defined in para 1 Sch 2A IA 1986) where a party incurs (or is expected to incur) a debt of at least £50 million and the arrangement which involves the issue of a capital market investment (as defined in para 2 Sch 2A IA 1986). 2. Public-private partnerships, utilities or urban regeneration (ss 72C, 72D, 72DA IA 1986) In respect of a project company of one of the following types of project where the project includes step-in rights: •

a ‘public-private partnership project’, ie a project where resources are provided partly by one or more public bodies and partly by one or more private persons or which is designed wholly or mainly for the purpose of assisting a public body in discharging a function;

•

a ‘utility project’, ie a project designed wholly or mainly for the purpose of a regulated business. Regulated businesses are providers of public services, and include gas, electricity and water suppliers, sewerage undertakers, railway operators and postal businesses;

•

an ‘urban regeneration project’, ie a project designed wholly or mainly to develop land which, at the commencement of the project, is wholly or partly in a designated disadvantaged area (outside Northern Ireland).

3. Project finance (s 72E IA 1986) In respect of a project company that incurs (or is expected to incur) a debt of at least £50 million for the purposes of carrying out the project where the project includes step-in rights. 4. Financial market contracts (s 72F IA 1986) In respect of a company that has granted: •

a market charge as per s 173 CA 1989; or

•

a system charge as per the Financial Markets and Insolvency Regulations 1996 (SI 1996/1469); or

•

a collateral security charge as per the Financial Markets and Insolvency (Settlement Finality) Regulations 1999 (SI 1999/2979).

5. Registered social landlord (s 72G IA 1986) In respect of a company registered as a social landlord for the purposes of Part I Housing Act 1996 (generally speaking, a housing association). 6. Protected railway and other companies (s 72GA IA 1986) In respect of: •

a water or sewerage company holding an appointment under Chapter I Part II Water Industry Act 1991; or

•

a protected railway company as per s 59 of the Railways Act 1993 (as extended by the Channel Tunnel Rail Link Act 1996); or

•

a company licensed to provide air traffic services as per s 26 Transport Act 2000.

258

Secured creditors 9.3

9.3.3  What is the appointment process? 9.3.3.1  When can the secured creditor appoint a receiver? Before a secured creditor can appoint a receiver, this right must have arisen under its security. (A secured creditor seeking to appoint an administrator by the out-of-court route must similarly be able to state that its security has become enforceable – see Chapter 4). There must therefore be some breach of the terms of a loan or security document by the company. Once the right to appoint has arisen, however, the secured creditor is entitled to have regard first and foremost to its own interests in determining when or whether to appoint. In Shamji v Johnson Matthey Bankers Ltd [1991] BCLC 36, the court made it clear that, if the power to appoint a receiver were granted to the mortgagee by the security documents in completely unqualified terms, a decision by the mortgagee to exercise the power could not be challenged except perhaps on the grounds of bad faith.

9.3.3.2  Making demand on the company Sometimes a security document will state that it is enforceable if specific defaults have occurred without the need for the secured creditor to take any further action. However, normal practice is nonetheless to make demand, even if this is not expressly required as a precursor to enforcement. The courts may regard an enforcement without any form of advance notice to the company as oppressive, as this gives the company no prior opportunity to repay the debt and redeem the security. Once it has made demand, the secured creditor needs only to give the company the time it would reasonably require to move funds ‘from some convenient place’ to make payment. There is no need to give the company time to negotiate a deal to produce the money if the company does not already have the funds available. This is sometimes known as the mechanics of payment test. The time required may be no longer than one hour provided the demand is made during banking hours (Cripps (Pharmaceuticals) Ltd v Wickenden [1973] 1 WLR 944). If the company has already made it clear that it does not have the funds available there is no need to give the company any further time at all (Sheppard & Cooper Ltd v TSB Bank Plc (No 2) [1996] BCC 965). If the company clearly has insufficient funds available, a mistake in the amount demanded (even if this means that the sum demanded is too large) or a failure to specify an exact sum which the company must pay will not normally invalidate the demand (Bank of Baroda v Panessar [1987] Ch 335). If there is any doubt as to the correct amount when putting together the demand, however, the secured creditor would probably still be wise to omit any items likely to be disputed. The real function of the demand is to enable the secured creditor to enforce. Excluding disputed items from the sum demanded will not prevent the secured creditor recovering them during the enforcement process, particularly if it expressly reserves its rights in this regard. In practice, many lenders wish to avoid a ‘hostile’ appointment if possible and prefer the company to invite them to appoint a receiver (or for the company or its directors themselves to appoint an administrator of the lender’s choice out of court). Even if the directors are reluctant to make such an invitation, they may well be advised that they have little option but to do so if they have received a demand which the company cannot meet. In these circumstances the company will clearly be cash-flow insolvent, 259

9.3  Secured creditors and were the directors to ignore the demand and attempt to trade on they are likely to be at increasing risk personally (as outlined in Chapter 6).

9.3.3.3  Making the appointment Assuming the company has not made payment, or otherwise remedied the stated breach, the secured creditor can appoint. To do so, it sends a written notice of appointment to the person, or persons, whom it intends to appoint as receiver(s). The appointment: •

Need not be by deed (unless the security document so requires). However, it is common practice for it to take this form (Phoenix Properties Ltd v Wimpole Street Nominees Ltd [1992] BCLC 737).

•

Should state the property over which the receiver(s) are to be appointed and should indicate the powers which they are entitled to exercise. Often it will simply provide that they are entitled to exercise all of the powers conferred upon receivers by the security document and otherwise by law.

•

Should state, if more than one person is to be appointed as receiver, which of their powers can be exercised by any one of them individually (see s 231(2) IA 1986 in the case of administrative receivers).

•

Should comply with any other requirements stipulated in the security document regarding the appointment of receivers.

In order to be effective, the appointment must be accepted by each receiver (or on their behalf by a person authorised by them) before the end of the next business day after that on which they receive the appointment. It may be orally accepted, but an oral acceptance must be confirmed in writing within seven days. The acceptance or confirmation must state the date and time of receipt of the instrument of appointment and the date and time of acceptance. Provided these requirements are complied with, the appointment takes effect from the time when the instrument of appointment was received (s 33(1) IA 1986 and r 4.1 IR 2016).

9.3.4  What are the consequences of an invalid appointment? The directors of the company retain the power to challenge the appointment of a receiver (see Chapter  6). A  challenge is, however, most likely to come from a liquidator because if the security can successfully be attacked on one of the grounds set out in Chapter 5 there will be more assets available for the unsecured creditors. If the security under which the receiver was appointed is invalid or there was a defect in their appointment, or indeed if they otherwise act outside of the powers vested in them, the receiver may be personally liable to the company in trespass or conversion. Their liability in this respect could potentially be serious. However, the courts have held that an invalidly-appointed receiver can commit the tort of conversion only in respect of chattels and not choses in action, and that they will not have committed the tort of wrongful interference with the performance of the company’s contracts (OBG Ltd v Allan [2008] 1 AC 1). Under s 232 IA 1986, an administrative receiver’s appointment is valid notwithstanding any defect in their appointment, nomination or qualifications. Where s 232 applies it will protect the administrative receiver as well as any party dealing with them. 260

Secured creditors 9.4 However, there is a distinction between an appointment in which there is some defect and a case where there is no appointment at all, for example because the security document was invalid. In the second case s 232 will not apply (OBG Ltd v Allan). The receiver will therefore need to check the validity of the security prior to their appointment. A newly appointed receiver will normally seek formal advice on the validity of their appointment. A  receiver may also seek an indemnity from their appointor to cover any losses they may suffer, whether as a result of a defect in their appointment or otherwise. This is a matter for negotiation. It is unlikely that a major bank will give such an indemnity, but it is more common in other cases. Under s 34 IA 1986, the court may also order the appointor to indemnify the receiver against any liability which arises solely as a result of the invalidity of their appointment.

9.4  WHAT IS THE STATUS OF A RECEIVER? 9.4.1  The receiver’s status as agent An administrative receiver is deemed to be the agent of the company unless and until the company goes into liquidation (s 44(1)(a) IA 1986). A non-administrative receiver is also deemed to be the company’s agent (s 109(2) LPA 1925). However, the security document will in any case almost always expressly state that the receiver is the company’s agent. This is an unusual type of agency in that the receiver still owes their primary duty to the secured creditor who appointed them rather than to the company (see Section 9.7). The company is unable to give the receiver instructions or to dismiss them. However, because the receiver is the agent of the company , it is the company (rather than the appointor) who is liable for the receiver’s acts. Furthermore, it is the receiver themselves rather than their appointor who will be responsible for any breach of duty by the receiver. The receiver’s special status will be lost if their appointor behaves in a way which constitutes the receiver its own agent (American Express International Banking Corp v Hurley [1985] 3 All ER 564). The appointor would then be liable for the receiver’s actions. A well-advised secured creditor will therefore allow the receiver to retain their independence by avoiding giving them direct instructions or liaising with them so closely that their independence might be called into question.

9.4.2  Entry into contracts A receiver will be personally liable on any new contract entered into by them in the performance of their functions, except insofar as the contract provides otherwise. Should they incur personal liability, the receiver will be entitled to an indemnity out of the assets of the company (s 37 and s 44 IA 1986 in the case of non-administrative and administrative receivers, respectively). However, in practice, any receiver will aim to make it expressly clear that they are contracting as the company’s agent without personal liability.

9.4.3  The effect of liquidation A company will frequently be placed into liquidation at some point after a receiver has been appointed. Liquidation will not bring the receiver’s appointment to an end – the 261

9.5  Secured creditors two processes operate in parallel, as the receiver is appointed over particular property of the company, rather than to the company itself (see Chapter 2). However, the receiver’s status as the company’s agent will terminate when a liquidator is appointed. This will not prevent the receiver continuing to exercise all of their powers in relation to the property over which they are appointed. They may still, among other things, begin or continue proceedings in the company’s name to recover property which is subject to their appointor’s security (see Gough’s Garages Ltd v Pugsley [1930] 1 KB 615). It does mean, however, that they will no longer be able to commit the company to any new liabilities (see Gosling v Gaskell [1897] AC  575). So as to continue to preserve their appointor’s independence, the receiver would normally enter into any further contracts as principal in their own right rather than as agent of their appointor. They will remain entitled to an indemnity out of the assets over which they have been appointed under ss 37 and 44 IA 1986. In practice, however, a receiver will be concerned that the company’s assets might conceivably be insufficient to satisfy any such indemnity. They may therefore ask for an additional indemnity from their appointor where the company enters into liquidation, even where they did not obtain an indemnity at the start of the receivership.

9.5  WHAT ARE THE OTHER CONSEQUENCES OF RECEIVERSHIP? 9.5.1  What is the effect on other insolvency proceedings? The appointment of an administrative receiver will prevent any person appointing an administrator out of court (paras 17 and 25 Sch B1  IA  1986). The court will also have no jurisdiction to make an administration order without the consent of the administrative receiver’s appointor and in the absence of circumstances which might render the security suspect (para  39 Sch B1  IA  1986, and see Chesterton International Group plc v Deka Immobilien Inv GmbH [2005] BPIR 1103). Otherwise, however, receivership should not prevent an administration or a liquidation being commenced or continued. The fact that a non-administrative receiver has already been appointed over some of the company’s assets will not prevent the appointment of an administrator, and indeed the administrator can require such a receiver to vacate office. Similarly, as already noted the appointment of a receiver (of any kind) will not prevent the company from being placed into liquidation.

9.5.2  What is the effect on the directors? The role of the directors once a receiver has been appointed is discussed in Chapter 6. If a non-administrative receiver is appointed only over certain assets of the company, the directors will need to continue to manage its remaining assets.

9.5.3  What is the effect on existing contracts? The appointment of a receiver does not terminate the contracts of a company. The terms of the contract itself may of course provide that the contract automatically comes to an end on the appointment of a receiver or, more normally, that the other party has the opportunity to terminate. For an administrative receivership (only), 262

Secured creditors 9.6 such termination provisions will be subject to the provisions of s 233B IA 1986, as discussed further in Section 9.8.3.2. Alternatively, the receiver may indicate that the company is no longer able to perform its obligations under the contract, and the resulting breach will give the other party the ability to terminate and/or to pursue other remedies. Should a receiver decide to continue an existing contract, this does not mean that they will become personally liable for pre- or even post-receivership liabilities under that contract, or that such liabilities will be receivership expenses – they will simply be unsecured liabilities of the company. In practice, a receiver will always make this expressly clear to the other party. The position is usefully analysed by the court in Powdrill v Watson [1995] 2 AC 394. Special rules apply to employment contracts (see Chapter 10). Damages are likely to be of limited use against an insolvent company. The other party may alternatively seek injunctive relief against the receiver. The courts have been disinclined to grant such relief in general (see, for example, Airlines Airspares v Handley Page [1970] Ch 193). The other party may, however, still obtain specific performance of a contract under which it has already acquired an equitable interest in land (Freevale Ltd v Metrostore Holdings Ltd [1984] Ch 199). As already noted in Chapter 4, this principle has been extended to an agreement to surrender a lease where a company is in administration, and the same principle should also apply where a receiver has been appointed (Re A Wear UK Ltd [2013] EWCA Civ 1626). The court has also required a receiver to honour the terms of an existing contract rather than obtain an additional ‘ransom’ payment for continuing to supply goods (Land Rover Group Ltd v UPF (UK) Ltd [2003] 2 BCLC 222).

9.5.4  What is the effect on the company’s documentation? Where a receiver or manager has been appointed, every invoice, order for goods or services, business letter or order form (whether in hard copy, electronic or any other form) issued and all of the company’s websites must contain a statement to this effect. The receiver or manager or any officer of the company commits an offence if they knowingly and willingly authorise or permit a breach of this requirement (s 39 IA 1986).

9.6  HOW ARE THE CREDITORS INFORMED AND INVOLVED? 9.6.1 Overview A  non-administrative receiver has few obligations to keep creditors informed. They need do little more than to ensure that the secured creditor files notice of their appointment (see Section 9.6.2) and then send periodic receipts and payments accounts to the Registrar of Companies (see Section 9.6.6). An administrative receiver has more extensive obligations in this regard, and the majority of this section will therefore relate just to administrative receivers.

9.6.2 Notices A secured creditor appointing any type of receiver must give notice of the appointment to the Registrar of Companies within seven days (s  859K CA  2006), although in practice the receiver will often carry out this task on its behalf. 263

9.6  Secured creditors An administrative receiver must send notice of their appointment to the company immediately and to all creditors of the company of whose addresses they are aware within 28 days after their appointment (unless the court directs otherwise). They must also advertise their appointment in the Gazette and in such other manner as they think fit (s 46(1) IA 1986 and r 4.5 IR 2016).

9.6.3  Statement of affairs Immediately following their appointment, an administrative receiver must require one or more ‘relevant persons’ to provide a statement of affairs (s 47 IA 1986). This is discussed further in Chapter 6. If they think it would prejudice the course of the receivership for the whole or part of the statement of affairs to be disclosed, they may apply to the court for an order for limited disclosure.

9.6.4  Administrative receiver’s report The administrative receiver must then prepare a report giving details of the events leading up to their appointment, how property has been (or is proposed to be) disposed of and how the business has been carried on. It must stipulate the amounts payable to the secured creditors who appointed them and to preferential creditors and the amount (if any) likely to be available for the payment of other creditors. It must also include a summary of the directors’ statement of affairs and the administrative receiver’s comments on this. It need not, however, include any information the disclosure of which would seriously prejudice the carrying out of the administrative receiver’s functions. The administrative receiver must send the report to the Registrar of Companies, the trustees for the secured creditors and the individual secured creditors (so far as the administrative receiver is aware of their addresses) within three months after their appointment (or such longer period as the court allows). Within the same time period, the administrative receiver must also either send a copy of the report to the unsecured creditors (so far as the administrative receiver is aware of their addresses) or publish an address to which unsecured creditors can apply for copies of the report (s 48 IA 1986 and r 4.14 IR 2016).

9.6.5  Creditors’ committee Where the administrative receiver has sent or published their report, the unsecured creditors may decide to establish a creditors’ committee. Any such committee will consist of three to five creditors and has a statutory duty to help the administrative receiver. This committee may require the administrative receiver to attend on it and furnish details to it as requested on seven days’ notice (s 49 IA 1986).

9.6.6  Receivership accounts A  non-administrative receiver must send receipts and payments accounts to the Registrar of Companies covering the 12-month period commencing on the date they were appointed and every subsequent period of six months. When they cease to act, they must also send accounts covering the remaining period of the receivership, 264

Secured creditors 9.7 together with a cumulative account. Each set of accounts must be submitted within one month of the end of the period covered, unless the Registrar of Companies agrees otherwise (s 38 IA 1986). An administrative receiver has similar obligations, save that they are only obliged to provide accounts for every 12-month period and when they cease to act they have two months to submit the final accounts. They must also deliver a summary of receipts and payments to each member of any creditors’ committee (r 4.17 IR 2016).

9.7  DUTIES OF THE RECEIVER 9.7.1  To whom are the receiver’s duties owed? A receiver’s primary duty is owed to their appointor, and is to bring about a situation where the debt due to their appointor can be repaid. However, the receiver will also owe a secondary duty to any other parties who have an interest in the secured property or its equity of redemption. Such other parties might include the company itself, a lower-ranking secured creditor or a guarantor of the secured debt. The receiver will not owe a separate duty to individual unsecured creditors or members, as they have no direct interest in the secured property (Medforth v Blake [1999] BCC 771).

9.7.2  What are the receiver’s secondary duties? In many respects, a receiver’s secondary duties will parallel those owed by the secured creditor itself to these same parties (see Silven Properties Ltd v Royal Bank of Scotland plc [2004] 4 All ER 484). One key difference, however, is that, whereas the secured creditor has no duty to take possession of the secured property or to exercise any of its other powers, once a receiver is appointed they must take possession and take certain other actions in order to fulfil their functions. The receiver’s secondary duties will therefore be wider in some respects than the duties of the secured creditor itself.

9.7.2.1  Duty to act in good faith The receiver has a duty towards other interested parties to exercise their powers in good faith, regardless of any competing interests of the secured creditor. A breach of this duty requires some dishonesty, improper motive or other actual element of bad faith. Mere negligence will not suffice here. However, complete indifference to the interests of the other parties or deliberately shutting their eyes to the consequences of their actions may constitute bad faith (Medforth v Blake). It was also emphasised in Medforth v Blake that the receiver’s duties to the other interested parties were not necessarily confined to the duty of good faith. The extent and scope of any additional duty will depend on the facts of each case, but a number of clear principles do exist, as set out below.

9.7.2.2  Duties in relation to a sale Provided the receiver acts in good faith, the receiver can give priority to their appointor’s interests in determining when to sell. As was made clear in the Silven 265

9.7  Secured creditors Properties case, they have no obligation to wait for the market to improve, or to incur time and expense in trying to enhance the value of the property prior to a sale (such as by seeking planning permission). If the receiver does decide to sell, however, they will have a duty to take reasonable care to obtain the best price which the circumstances of the case permit on the sale of an asset, as per Davey v Money [2018] EWHC 766 (Ch), where the court approved this wording as best describing the equivalent duty for an administrator. The courts have, however, worded the duty in question in a variety of slightly different ways over the years. In the Silven Properties case, the court regarded a receiver as having a duty to ‘take care to obtain the best price reasonably obtainable’. It may well be that in most cases there is little difference in practice between the various formulations. The existence of this duty normally means that, unless there is a need for an urgent sale (eg because goods over which they are appointed are perishable), the receiver must fairly and properly expose the property to the market or sell at a price based on previous exposure to the market. The receiver should not omit to mention key information to interested parties which could affect price, and should respond to enquiries from interested parties appropriately. In this context, the court has also made it clear that when a receiver sells a mortgaged property as part of a portfolio sale they must first ask themselves whether that course of action is likely to produce a better result for the mortgagor than selling the property individually (McDonagh v Bank of Scotland Plc [2018] EWHC 3262 (Ch)). The other points made in Section 9.2.1.3 in relation to a secured creditor exercising a power of sale are also likely to be relevant to a receiver.

9.7.2.3  Duties in relation to a business The receiver also owes a duty to manage the property over which they are appointed with due diligence. In Medforth v Blake it was made clear that, whilst due diligence does not oblige the receiver to continue to carry on a business of the company, if the receiver does carry on the business, due diligence requires them to take reasonable steps to try to do so profitably. In Medforth itself, the receivers failed in this duty by not taking advantage of substantial discounts which were available.

9.7.2.4  Duties in managing property generally Although the receiver may not be obliged to sell the secured property immediately or to trade any business, the duty to manage with due diligence means that the receiver cannot simply remain passive. They must exercise their powers to preserve and protect the property over which they have been appointed. For example, a receiver who failed to trigger a rent review clause in a lease was in breach of this duty (Knight v Lawrence [1991] BCC 411).

9.7.3  Additional duties of an administrative receiver Like a liquidator in a compulsory liquidation, an administrative receiver is an officer of the court. The administrative receiver also has a specific duty to pay preferential creditors (s 40 IA 1986), as discussed further in Chapter 2. 266

Secured creditors 9.8

9.8  POWERS OF A RECEIVER 9.8.1  Where are a receiver’s powers found? Assuming that their powers are not limited by the terms of their appointment, the receiver will have: •

the powers conferred upon them by law; and

•

any additional powers conferred upon them under the terms of the security document under which they are appointed.

Under s 42 IA 1986, an administrative receiver is already given the very wide powers set out in Sch 1 IA 1986 (see Table 4.4 in Chapter 4). A non-administrative receiver is only given very limited powers by the Law of Property Act 1925. However, these limited powers will not be discussed further in this book, since normal practice now is for the security document expressly to confer powers equivalent to those in Sch 1 IA 1986 on all receivers. Any receiver is given the power to apply to court for directions (s 35 IA 1986).

9.8.2  What is the receiver’s status when selling property? Normally, the receiver sells property as agent in the name of the company. As such, they cannot transfer any better right than the company itself has. In order for the buyer to acquire the property free of the security under which the receiver was appointed, the receiver’s appointor will need to enter into a deed of release. Similarly, a deed of release will also be required from any other person holding security over the property (Re Real Meat Co [1996] BCC 254). If the holder of a prior or equal-ranking security refuses to give a release, an administrative receiver has the power to apply to court (see Section 9.8.3.1). Additionally, a secured creditor is able to overreach lower-ranking security by exercising its own power of sale and will appoint the receiver as its own agent just for the purposes of the sale. The lower-ranking security holder’s rights then attach to any surplus sale proceeds. If the buyer is connected to one or more of the directors of the company, s 190 CA 2006, which seeks to limit a director’s ability to sell a company’s property to themselves, will continue to apply. (Section 193 CA 2006 disapplies s 190 CA 2006 where an administrator or liquidator has been appointed, but makes no reference to a receiver – see Demite Ltd v Protec Health Ltd [1998] BCC 638.) The sale may therefore still require the approval of the company’s members if the value of the property being sold exceeds 10% of the company’s net asset value and is more than £5,000 or if its value exceeds £100,000. Where member approval is not forthcoming, however, directors will typically seek to circumvent the operation of this section by resigning from the company’s board prior to the sale.

9.8.3  What additional powers does an administrative receiver have? 9.8.3.1  Power to dispose of charged property An administrative receiver may apply to the court for an order to dispose of a property free of any security which is prior or equal-ranking to that of their appointor. The 267

9.9  Secured creditors court may make such an order if it thinks that disposal of the property in question (with or without other property) would be likely to promote a more advantageous realisation of the company’s assets than would otherwise be affected. In addition, any order is subject to the condition that: •

the net proceeds of the disposal; and

•

where those proceeds are less than such amount as may be determined by the court to be the net amount which would be realised on the sale of the property in the open market by a willing vendor, such sums as may be required to make good the deficiency

be applied towards discharging the sums secured by the security (s 43 IA 1986).

9.8.3.2  Power to require continuing supplies The provisions of the IA 1986 which protect contracts for the supply of goods and services in an administration are discussed in detail in Section 4.9. The provisions of s  233  IA  1986 and s  233B IA  1986 apply equally when an administrative receiver is appointed over a company’s assets. However, the provisions of s  233A IA (described in Section 4.9.3) do not apply when an administrative receiver is appointed.

9.8.3.3  Specific powers of investigation The administrative receiver has the same powers of investigation under ss  234 and 236 IA 1986 as a liquidator (see Chapter 3). They will also be assisted by the directors’ and employees’ duty to co-operate with an insolvency officeholder under s 235 IA 1986 (see Chapter 6).

9.9  ENDING THE RECEIVERSHIP The receivership is complete when the receiver’s appointor has been paid in full or when the receiver has sold all the property over which they were appointed and distributed all the proceeds to their own appointor and to any other persons to whom they are required to pay monies in priority to their appointor (see Chapter 2). They will have no responsibility to make any distribution to ordinary unsecured creditors. They will hand any surplus proceeds to a lower-ranking secured creditor if there is one. In the absence of any lower-ranking secured creditor, they will hand them over to any liquidator or, if the company remains outside of liquidation, to the company itself. Once they have done so, their appointment comes to an  end. Besides filing their final accounts (see Section 9.6.6), the only further formality required will be to notify the Registrar of Companies that they have ceased to act (s 859K CA 2006). Administrative receivers are required to give this notice to the Registrar within 14 days (s 45(4) IA 1986). 268

Secured creditors 9.10

9.10  FINANCIAL COLLATERAL ARRANGEMENTS (NO 2) REGULATIONS 2003 9.10.1  To what do these Regulations apply? The Financial Collateral Arrangements (No  2) Regulations 2003 (SI  2003/3226) were originally introduced to implement an EC  Directive whose goals were to simplify the process of taking financial collateral throughout the EU by, among other things, setting out minimum criteria for the creation, perfection and enforcement of security in ‘financial collateral’. Many of the transactions falling within the ambit of these Regulations are specialised and beyond the scope to this book. However, the Regulations are drafted more widely than the Directive itself and so may improve a secured creditor’s position even where it holds more commonplace types of security over cash or shares. In R  (on the application of Cukurova Finance International Ltd) v HM  Treasury [2008] EWHC 2567 (Admin), the claimant argued that HM Treasury’s decision to extend the Regulations beyond the scope of the Directive was inappropriate, but the court was not sufficiently impressed by this argument to grant the claimant the extension of time it needed to bring judicial review proceedings to challenge the Regulations. Section 41 of the Financial Services Act 2021 confirms the Regulations as having effect and to be treated as having had effect despite any lack of power to make the Regulations, which should now place their status beyond doubt. The Regulations apply to financial collateral arrangements between non-natural persons (including companies) which were entered into on or after 26 December 2003. These include an arrangement where a security interest is taken over financial collateral which is in the possession or under the control of the collateral-taker. The regulations define: •

financial collateral as cash or financial instruments, including shares in companies and equivalent securities. (HM  Treasury has stated that the Regulations do not apply to non-financial collateral such as commercial property, plant and machinery or book debts); and

• a security interest to include a mortgage, fixed charge, pledge, lien or floating charge, although in the latter case the collateral must still be delivered, transferred, held, or registered in a manner to be in the control or possession of the collateral-taker. In Gray and others v G-T-P  Group Limited: Re F2G  Realisations Limited (in liquidation) [2010] EWHC 1772 (Ch), the court made it clear for the Regulations to apply, it was necessary that ‘legal control’ as opposed to ‘administrative control’ of the underlying collateral must be transferred to the chargee. Therefore despite the fact that floating charges are included within the definition of security interest, it is unlikely that a typical English law floating charge, ie a charge over a fluctuating class of assets with which the company is free to deal until a future time, will in practice ever fall within the scope of the Regulations. Nevertheless, in Re Lehman Brothers International (Europe) (in administration) [2012] EWHC 2997 (Ch), it was suggested that an arrangement where the company was permitted to withdraw or substitute collateral, provided that sufficient collateral remained to cover the debt due to the secured creditor, might still fall within the scope of the Regulations. 269

9.10  Secured creditors The ECJ considered the control requirement in the Financial Collateral Directive in Private Equity Insurance Group SIA v Swedbank AS (C-156/15) [2017] 1 WLR 1602. The Advocate General reviewed and endorsed the above two cases as part of his opinion. The ECJ’s judgment did not expressly refer to these cases, but made it clear that the taker of collateral in the form of monies lodged in an ordinary bank account may be regarded as having acquired ‘possession and control’ of those monies only if the company is prevented from disposing of them.

9.10.2  What advantages do the Regulations confer? 9.10.2.1 Enforcement Where a financial collateral arrangement creates a security interest, certain provisions of the IA  1986 will not apply to the enforcement of that security (reg  8 of the Regulations). As a result, where the company is in administration: •

the secured creditor is able to enforce its security without requiring the consent of an administrator or the permission of the court;

•

the administrator has no ability to deal with the collateral under paras 70 and 71 Sch B1 IA 1986 (which would normally allow them to deal with charged property); and

•

the administrator cannot require a receiver appointed over the collateral to vacate office.

Similarly, where the company has the benefit of a Part A1 Moratorium, the secured creditor will also be able to enforce its security without requiring the permission of the court. Perhaps most important, however, is the ability which the Regulations confer upon the security holder to appropriate financial collateral in satisfaction of the underlying financial obligations in an amount equal to the value of that collateral. Where the financial collateral arrangement creates a legal or equitable mortgage on terms which give the secured creditor the right to appropriate the financial collateral, it may exercise this power in accordance with the terms of the arrangement without first seeking a foreclosure order (reg 17(1) of the Regulations). There is a useful analysis in Cukurova Finance International Ltd v Alfa Telecom Turkey Ltd [2009] UKPC 19 as to whether an appropriation had validly occurred on the facts of that case. Following exercise of appropriation, the equity of redemption of the company is extinguished, and all legal and beneficial interest of the company in the financial collateral vests in the secured creditor (reg  17(2) of the Regulations). Regulation 17(2) came into force after the appropriation by Alfa; therefore the Privy Council’s further decision in the Cukurova saga that, notwithstanding a secured creditor’s appropriation of shares, the English law equitable remedy of relief from forfeiture is still in principle available to the company would no longer seem to apply (see Cukurova Finance International Ltd v Alfa Telecom Turkey Ltd [2013] UKPC 2). It should also be noted that, in the Cukurova case, there were a number of specific concerns around the circumstances of enforcement and the reasons for appropriation by Alfa, which may have had a bearing on the decision. Where a secured creditor exercises its power to appropriate collateral, it must value the financial collateral in accordance with the terms of the secured agreement and, 270

Secured creditors 9.10 in any event, in a commercially reasonable manner (reg 18(1) of the Regulations). However, this valuation can, if necessary, take place after the date of the appropriation. In ABT Auto Investments Ltd v Aapico Investment Pte Ltd [2022] EWHC 2839 (Comm), the court held that there was no additional requirement for the secured creditor to act in good faith. Where the value of the financial collateral differs from the amount of the underlying financial obligations secured, then in accordance with reg 18(2) of the Regulations: •

the secured creditor must account to the company for the amount by which the value of the financial collateral exceeds the relevant financial obligations; or

•

as the case may be, the company will remain liable to the secured creditor for any amount whereby the value of the financial collateral is less than the relevant financial obligations.

9.10.2.2  Avoidance provisions In addition, certain other provisions of the legislation are disapplied in relation to financial collateral arrangements (reg  10 of the Regulations). As a result, among other things: •

the prescribed part will not apply to any charge created or arising under a financial collateral arrangement; and

•

a floating charge created or otherwise arising under a financial collateral arrangement cannot be avoided under s 245 IA 1986.

9.10.2.3  Creation and perfection of security Finally, certain requirements for the creation and perfection of security are disapplied (reg 4 of the Regulations). As such: •

a financial collateral arrangement need not take any specific written form, and there is no signature requirement; and

•

a failure to register the security interest under s  859A CA  2006 will not invalidate it.

In practice, creditors are usually advised to continue to create, register and otherwise perfect that security as if the Regulations had not been introduced. However, they may provide a useful fallback if one of the normal requirements, such a registration, is overlooked.

271

Chapter 10

Other special types of creditor

10.1 INTRODUCTION Chapter  9 considered the position of secured creditors. This chapter specially considers the positions of certain other types of creditor who, whilst they do not hold security over the assets of the company, are for various other reasons in a different position from other unsecured creditors. These are: • landlords; • employees; •

pension scheme trustees; and

•

retention of title creditors.

10.2 LANDLORDS 10.2.1 Overview Table 10.1 summarises the effect of various different formal insolvency processes on a landlord’s rights. These rights, and therefore the landlord’s potential options will differ significantly, depending on the insolvency process which its tenant has entered into. However, its concerns are likely to revolve around its ability: •

to recover any arrears of rent, whether from the tenant, or from any other source;

•

to recover rent falling due during (and after) the formal insolvency process, whether from the tenant or from any other source; and

•

to forfeit the lease.

A landlord will receive a proposal for a CVA or Restructuring Plan in advance of any CVA or Plan being implemented and will have the chance to consider it. In contrast, the first a landlord may learn of a receivership, administration, liquidation or Part A1 Moratorium may well be when it is contacted on behalf of the newly appointed insolvency officeholder. In each case, however, the landlord would be wise to consider its overall strategy as early as possible to avoid losing out on possible options. For example: •

It may need to retain the threat of forfeiture as a means of exerting leverage, and if so it will need to ensure it does not inadvertently waive any breach of the lease by continuing to demand or accept rent. In this regard, any managing agents should be given clear instructions to ensure that rent demands are no longer sent out automatically shortly before each payment date. 272

Other special types of creditor 10.2 •

A surrender may be less attractive than other options, and it will need to be cautious not to accept a surrender by operation of law by retaining keys which the insolvency officeholder returns or attempts to return to it.

A  number of temporary restrictions were introduced in response to the Covid-19 pandemic. At the time of writing there is still a moratorium on a landlord: (i) presenting a winding-up petition; (ii) making a debt claim in civil proceedings; (iii) using the commercial rent arrears recovery power; (iv) enforcing a right of re-entry or forfeiture; or (v) using a tenant’s deposit in respect of ‘protected rent debts’ accrued between 21  March 2020 and 18  July 2021 if an arbitration between landlord and tenant pursuant to the Commercial Rent (Coronavirus) Act 2022 was initiated before 24 September 2022 and has not yet concluded. Additionally, the company itself may not seek to compromise those protected rent debts through a CVA, Scheme or Plan in these circumstances. Otherwise, however, these temporary restrictions have now fallen away and so will not be discussed further.

10.2.2  Tenant in receivership Neither an administrative nor a non-administrative receiver has any special protection against a landlord’s rights. As such, the onus will be on the receiver to come to an appropriate arrangement with the landlord, and they may well offer to pay ongoing rent. (For the same reason, however, it is unlikely that a tenant and its secured creditor(s) will choose administrative receivership as an option, even when this is still available, if it is important to the business that it retains its premises.) There is no requirement on the part of a receiver to deal with unsecured creditors’ claims generally, however. Therefore to the extent that the receiver fails to pay the rent and the landlord is unable to recover it through its other remedies, it is likely to need to prove as an unsecured creditor in a subsequent liquidation of the company.

10.2.3  Tenant in administration 10.2.3.1  Arrears of rent The landlord again will only be an unsecured creditor in respect of any arrears of rent relating to the period prior to the start of the administration. Due to the administration moratorium, the landlord will need the consent of the administrator or the permission of the court to take any enforcement action to recover this rent and it is unusual for such leave to be given, since this is purely a financial loss (see Chapter 4). The landlord is likely to have to prove alongside any other unsecured creditors in the administration itself (if it becomes a ‘distribution’ administration), or more likely in a subsequent liquidation. However, many administrations will result in the sale of the company’s business to a buyer who wishes to remain in the premises. If, as in most cases, the lease requires the landlord’s consent to any assignment, the landlord may be able to negotiate for the buyer to pay all or part of these arrears as a condition of granting its consent. This assumes, of course, that the landlord is happy in other respects for the lease to be assigned to the buyer. Even if this is the case, the landlord may also need to maintain the threat of forfeiture in the short term as leverage, although see Section 10.2.3.3 in this respect. 273

274

N/A

Yes

Notice to officeholder N/A requiring them to elect whether to disclaim

Yes

Yes

Drawdown on rent deposit

Pursue guarantor or former tenant

Yes

Yes

Yes

No, unless consent of the administrator or permission of the court obtained

No, unless consent of the administrator or permission of the court obtained

Notice to subtenants under s 81 Tribunals, Courts and Enforcement Act 2007 to recover subrent direct

Yes

Forfeiture by court proceedings

No, unless consent of the administrator or permission of the court obtained

Yes

Yes

Court proceedings for recovery of arrears of rent/ damages

No, unless consent of the administrator or permission of the court obtained

Administration

Forfeiture by peaceable re-entry

Yes

Receivership

Types of Insolvency

Commercial rent arrears recovery (CRAR)

Remedies

Yes

Yes

Yes

Yes

No, unless leave of the court obtained (although some argue that not an ‘action or proceeding’)

No, unless leave of the court obtained

No, unless leave of the court obtained

No, unless leave of the court obtained (cannot be commenced after date petition is presented)

Compulsory liquidation

Yes

Yes

Yes

Yes

Yes, but liquidator may obtain temporary relief from the court

Yes, but liquidator may apply to the court for a stay

Yes, but liquidator may apply to the court for a stay

Yes, but liquidator may apply to the court for a stay

Voluntary liquidation

Yes

Yes

N/A

Yes

Yes

Yes

Yes

Yes

CVA or Plan proposed

Table 10.1 – Remedies available to landlord for tenant’s breach of covenants where tenant is insolvent Part A1 Moratorium

Yes, subject to the terms of the CVA or Plan

Yes, subject to the terms of the CVA or Plan

N/A

Yes, subject to the terms of the CVA or Plan, and depending on whether terms breached

Yes, but only if CVA or Plan terms breached

Yes, but only if CVA or Plan terms breached

Yes

Yes

N/A

Yes

No, unless permission of the court obtained

No, unless permission of the court obtained

Yes, for rent due No, unless under the terms of permission of the the CVA or Plan, but court obtained only if CVA or Plan terms breached

Yes, for rent due No, unless under the terms of permission of the the CVA or Plan, but court obtained only if CVA or Plan terms breached

CVA or Plan approved

10.2  Other special types of creditor

Other special types of creditor 10.2

10.2.3.2  Ongoing rent In Jervis v Pillar Denton Ltd [2014]  EWCA  Civ 180, the Court of Appeal held that, where an administrator or liquidator makes use of a leasehold property for the benefit of the administration or liquidation, rent due under the lease of that property is payable as an expense of the administration or liquidation but only for the period of use, and will be treated as accruing from day to day for that purpose, regardless of whether rent is payable in arrears or in advance and when it actually falls due. In Re MK Airlines Ltd (In Liquidation) [2012] All ER (D) 142 (May), a case relating to a provisional liquidation, the court held that the provisional liquidators who were merely retaining and securing property situated on the leased premises were not using the premises for the purposes of the provisional liquidation. The fact that rent is payable as an administration expense does not mean the landlord will be actually able to recover the rent on the days when it falls due under the lease, since an administrator is only required to discharge the administration expenses at the end of the administration. Although the landlord will gain priority status, treatment as an administration expense also does not automatically mean that it can be certain of being paid in full, as there may be too few floating charge recoveries at the end of the administration from which to discharge all of the administration expenses. However, if the rent is not paid when due, the landlord may be able to exercise its right to forfeit the lease (see Section 10.2.3.3). It is possible therefore that a landlord may be able to use the threat of forfeiture to persuade the administrator to pay rent on an ongoing basis.

10.2.3.3 Forfeiture Any non-payment of rent and indeed the tenant’s entry into administration are both likely to trigger the landlord’s right to forfeit (unless the landlord waives this right). Again, however, due to the administration moratorium, a landlord will not be able to exercise this right without the consent of the administrator or the permission of the court. The court will apply the principles set out in the Atlantic Computers case in deciding whether to grant permission. The fact that the administrators are not paying ongoing rent will not be determinative here, but it should be a powerful factor in favour of granting permission. The administrator may choose therefore to come to an arrangement to pay all, or at least part, of the rent on an ongoing basis whilst the premises are being used for the purposes of the administration. The landlord will sometimes find that a sale of the business has already taken place, and the administrator has allowed the buyer into occupation on a licence arrangement either on a short-term basis or pending the grant of landlord’s consent to a formal lease assignment. This will generally not be permitted under the terms of the lease, and so would be a further breach. The landlord may not wish to consent to an assignment even if the licensee’s subrent is funding the continuing rent under the lease. It may consider the licensee’s financial standing to be of dubious strength, it may wish to avoid losing a guarantee from a previous tenant of better financial standing arising under a current ‘authorised guarantee agreement’, or it may simply have a stronger alternative tenant available to whom it might re-let. In this case, it will wish to remove the unlawful licensee. Conversely, the landlord may consider the licensee’s covenant to be better than that 275

10.2  Other special types of creditor of the tenant in administration if there is no previous tenant and little prospect of a re-letting to a new tenant, and on that basis be willing to consent to an assignment. In Metro Nominees (Wandsworth) (No  1) Ltd v Rayment [2008]  BCC  40, the administrator had agreed to assign the lease to the buyer and had allowed the buyer into occupation, but had agreed no provision for compensation in the event that the landlord refused consent to assign. The court granted the landlord permission to commence forfeiture proceedings on the basis that this would not impede the purpose of administration, as the retention of the lease would not have resulted in any further benefit to the company in administration. Lazari GP Ltd v Jervis [2012] EWHC 1466 (Ch) and SSRL Realisations Ltd (in administration) [2015] EWHC 2590 (Ch) provide other examples of cases where the court granted permission to forfeit on substantially similar grounds. In the case of Innovate Logistics Ltd v Sunberry Properties Ltd [2009] BCC 164, however, the facts of which are set out in the box below, the Court of Appeal refused the landlord’s application for an injunction to terminate an illegal licence. The landlord had been positioning itself to remove the buyer in order to preserve bargaining power to oblige the buyer to accept a full assignment of the lease. As the above cases illustrate, each case will be determined on its own facts, but among other things the question of whether the buyer’s occupation of the premises is genuinely continuing to benefit the company in administration and the conduct of the parties will remain relevant. Innovate Logistics Ltd v Sunberry Properties Ltd [2009] BCC 164 The company was placed into administration. On the same day, its business and assets were sold to a buyer, YHL. The company’s book debts of approximately £9 million were excluded from the sale, although YHL was obliged to assist in their collection. The administrators were concerned that if the goods stored at the company’s premises were not delivered in accordance with customer contracts, this would impede YHL’s ability to collect the book debts. Therefore the terms of the sale also obliged YHL to take on the company’s obligations under these outstanding customer contracts. To facilitate this, YHL was granted an occupational licence to the premises for six months, in breach of the terms of the lease. The landlord wished YHL to take an assignment of the lease. When YHL refused to do so, the landlord sought permission of the court to commence proceedings for an injunction to terminate the licence. At first instance, the judge took the view that the purpose of the administration had been achieved on the first day by the pre-pack sale to YHL and that the granting of permission to bring proceedings would not therefore impede the purpose of the administration. He also considered that, because the licence had been granted in breach of the lease, there was no ‘legitimate’ interest on the part of the company and its other creditors to balance against that of the landlord. He held that he did not therefore need to carry out the balancing exercise outlined in Atlantic Computers, and granted permission. The Court of Appeal held, however, that the judge’s reasons for not carrying out the balancing exercise were inadequate. The injunction, if granted, would remove YHL’s ability to carry out the contracts and to assist in getting in the book debts. 276

Other special types of creditor 10.2 The landlord’s main loss if it were refused permission would be its bargaining position in attempting to require YHL to take on a new lease (in which respect the court inferred that the passing rent must therefore be greater than the market rent). After carrying out the balancing exercise on this basis, the Court of Appeal held that the result was very much in favour of refusing permission.

10.2.3.4  Does the landlord want the premises back? Unlike a liquidator, an administrator has no ability to disclaim the lease. They will therefore need the landlord’s co-operation to bring the lease to an end prematurely. Unless the landlord has another proposed tenant or use for the premises, there may be a disadvantage to the landlord in forfeiting or accepting a surrender. So long as the company is the tenant, it is the company which remains the ‘occupier’ for the purpose of non-domestic business rates, whether or not it has vacated the premises. (If the company is continuing to use the premises, these rates will be an administration expense although if it has vacated the premises it will be granted relief against the requirement to pay further rates). If the lease is determined, however, the landlord as owner will become liable for the rates, subject to a limited period of relief.

10.2.4  Tenant in liquidation 10.2.4.1  Arrears of rent The landlord will only be an unsecured creditor in respect of any arrears of rent relating to the period prior to the start of the liquidation. It will have to prove alongside the other unsecured creditors in the liquidation to the extent that it is not able to recover this rent by the exercise of other remedies. A voluntary liquidation will not prevent the landlord from bringing proceedings for unpaid rent (although there is likely to be little benefit in doing so) or from exercising commercial rent arrears recovery (CRAR) pursuant to the Tribunals, Courts and Enforcement Act 2007 (TCEA 2007), although the liquidator may apply for a stay. The moratorium in a compulsory liquidation will prevent the landlord taking or continuing these actions without the leave of the court – there is case law pre-dating the TCEA 2007 which held that the moratorium applied to a distress which had not been completed before the winding-up order was made and it seems likely that this would now apply equally to CRAR (see Memco Engineering Ltd [1986] Ch 86). The court’s approach to applications for a stay or for leave is discussed generally in Chapter 3.

10.2.4.2  Ongoing rent For the reasons discussed in Chapter 2, any rent relating to a period when the liquidator is using the premises for the purposes of the liquidation should be a liquidation expense, and will thus be given priority status. The case of Re MK Airlines Ltd (In Liquidation) (see Section 10.2.3.2), which also confirmed that the liquidation expenses principle applies equally to a provisional liquidation, is helpful in determining when a liquidator is using the premises for these purposes. If they need to use the premises more extensively, however, it may be that a liquidator will still need to come to an arrangement to pay rent to the landlord on an ongoing basis. 277

10.2  Other special types of creditor

10.2.4.3 Forfeiture A  voluntary liquidation will not prevent the landlord from exercising rights of forfeiture, and whilst the liquidator may be able to obtain a stay, they would have to move quickly to prevent forfeiture by peaceable re-entry. The moratorium in a compulsory liquidation will prevent the landlord forfeiting without the leave of the court. However, it is considered unlikely that a court would grant a stay (or relief from forfeiture) in a voluntary liquidation, or refuse a landlord leave to forfeit in a compulsory liquidation, if rent were not being paid. As an alternative to forfeiture proceedings, a landlord may give 28 days’ notice to a liquidator to require them to decide whether to disclaim. This may encourage the liquidator to vacate the premises during this period if they do not require them in the longer term (see Chapter 3 and Section 10.2.4.4 below).

10.2.4.4  Disclaimer versus surrender? Given that a liquidator is unlikely to trade a company’s business, it is unlikely that the liquidator will wish to retain premises in the longer term. If they are using the premises at all, it is more likely to be for short-term storage of assets which they will dispose of in the liquidation, in which case they should be content to vacate fairly early. It is rare therefore for a landlord to need to forfeit, and it is more likely to need to decide whether it wishes the liquidator to disclaim or to agree a surrender of the lease. The advantages to the landlord of a disclaimer over surrender (or forfeiture) are: •

whilst the tenant company’s obligations under the lease come to an end, the landlord has a claim for compensation against the tenant which it can prove in the liquidation (see Re Park Air Services Plc [2000] AC 172 regarding the calculation of this). This may be relevant if there is likely to be a significant dividend to unsecured creditors; and

•

because the disclaimer does not affect the obligations of other parties, it will be the landlord’s route of choice if it is seeking to recover arrears/ongoing rent from a previous tenant or guarantor.

However, a landlord may still prefer a surrender: •

where it will be seeking to recover ongoing rent direct from a sub-tenant. As also discussed in Section 10.2.8.2, a disclaimer of a lease will also determine a sub-lease, enabling the sub-tenant to walk away if it wishes (although the subtenant may also choose to remain in occupation by continuing to pay the rent and observing the covenants in the headlease – Re A E Realisations (1985) Ltd [1988] 1 WLR 200); or

•

where there will be no significant dividend in the liquidation, in which case the surrender may simply be a cleaner way of bringing the lease to an end.

10.2.5 CVA 10.2.5.1  Before the CVA is approved The CVA process imposes no restriction on a landlord’s ability to exercise its rights prior to approval of the CVA. However, if it is important to the company’s business that it retains its leasehold premises, the company may conceivably obtain 278

Other special types of creditor 10.2 a moratorium by commencing a Part A1 Moratorium or entering into administration pending approval of the CVA. The landlord will, however, wish to examine the terms of the CVA carefully to see how it will be affected if it is approved. In this respect, a landlord suffers a disadvantage when voting against a CVA in that any claim it may have for future rent will be valued at £1 only for voting purposes unless the convenor, chair or other appointed person decides to put a higher value on it (r 15.31(3) IR 2016). The landlord should perhaps therefore also consider whether it is likely to wish to challenge the CVA, if approved, on the basis that it is unfairly prejudiced given the fairly short period of time allowed for such a challenge, albeit landlords have brought a number of such challenges recently without success (see Chapter 8).

10.2.5.2  After the CVA is approved The range of possible terms for a CVA is wide, so it is difficult to state with certainty how a CVA, once approved, will affect a landlord. However, it may well reschedule the date for payment of any arrears of rent and/or reduce the amount of such arrears which can be recovered. Additionally or alternatively, it may seek to reduce the ongoing rent which the landlord will receive during the period of the CVA. The landlord will be unable to forfeit for non-payment of sums due under the lease unless this is a breach of the terms of the CVA. Its ability to forfeit for any other breach which may occur would be unaffected in the absence of anything to the contrary in the CVA, however, and indeed it may still separately be able to forfeit on the basis of the tenant’s insolvency if the lease so provides, provided it has not waived this right (Thomas v Ken Thomas Ltd [2007] BPIR 959). In practice, a CVA will normally now be drafted to address this.

10.2.6  Restructuring Plan The considerations which apply to a Restructuring Plan are similar to those described for a CVA. However, the existence of cross-class cram-down may make it more difficult for landlords collectively to oppose a CVA (see Section 8.3.7.7).

10.2.7  Part A1 Moratorium Arrears of rent attributable to a period prior to the moratorium will be an ordinary pre-moratorium debt subject to a payment holiday, but ongoing rent attributable to a period during the moratorium will be a priority pre-moratorium debt and therefore not subject a payment holiday (see Section 2.4.2). The monitor will be obliged to terminate the moratorium if they think that the company will be unable to pay this ongoing rent (see Section 7.6.5). The landlord will not, however, be able to forfeit the lease or to take other actions to recover the arrears of rent from the company while the Part A1 Moratorium is in place without the permission of the court.

10.2.8  Repayment from other sources As a general rule, the fact that the tenant is in a formal insolvency process should not prevent the landlord from drawing down on a rent deposit or from pursuing any 279

10.2  Other special types of creditor third party who might be liable, such as a guarantor, an original tenant (where the lease pre-dates 1 January 1996), a previous tenant who has entered into an authorised guarantee agreement or ‘AGA’ (where the lease post-dates 31 December 1995) or a sub-tenant. However, it is worth commenting further in a couple of these cases.

10.2.8.1  Rent deposits The landlord will need to check the terms of the rent deposit agreement to ensure that they permit it to draw down. Normally a rent deposit will also be secured by a fixed charge over the cash deposited in a bank account. Drawing down on the deposit would therefore normally constitute an enforcement of security, and it is considered in this context: •

If the tenant is in receivership, this should not prevent drawdown even if another secured creditor holds all-asset security, since the landlord is still likely to hold the prior-ranking fixed charge over the deposit monies.

•

If the tenant is in administration, an enforcement of security would normally require the consent of the administrator or the permission of the court. However, if the security was set up after 26 December 2003, the landlord can argue that, under the Financial Collateral Arrangements (No  2) Regulations 2003, the administration moratorium does not apply to the charged deposit of cash (see Chapter 9). Regardless of this, it is suggested that an administrator ought normally to give this consent provided that they are satisfied that the charge has been properly taken, since the rent deposit monies, as fixed charge assets, are never likely to become available to anyone other than the landlord, at least to the extent that the landlord is still owed sums secured by the deposit.

•

If the tenant is in liquidation, this will not prevent drawdown, since not even the moratorium in a compulsory liquidation prevents the enforcement of security.

•

A similar argument to the above ought to apply to a CVA. Even if the CVA is passed, it is arguable that the landlord should still be able to draw down, given that a CVA cannot bind a secured creditor without their consent. However, the situation may be more complicated if the landlord has not highlighted the fact of its security to the nominee prior to the CVA meetings, particularly if it has subsequently voted in favour of the CVA or done anything else to suggest its consent. A landlord should therefore act early to protect its position.

•

If the tenant has proposed a Restructuring Plan, this will make clear whether the Plan is also seeking to compromise the right to drawdown a rent deposit. It will not prevent the tenant drawing down the deposit before the Plan had been sanctioned if there are existing arrears of rent.

•

If the tenant is subject to a Part A1 Moratorium, it can be argued that, as for an administration moratorium, under the Financial Collateral Arrangements (No 2) Regulations 2003 the Part A1 Moratorium does not apply to the charged deposit of cash.

10.2.8.2 Sub-tenants The fact that the tenant is in formal insolvency should not prevent the landlord serving notice on any sub-tenant pursuant to s  81  TCEA  2007 to allow it to collect rent 280

Other special types of creditor 10.2 from the sub-tenant direct. Even the administration moratorium should not restrict use of this remedy. Case law preceding the TCEA 2007 made it clear that service of a notice under the predecessor to s 81 TCEA was not the equivalent of levying distress (Wallrock v Equity and Law Life Assurance Society [1942] 2 KB 82) and, to the extent that service of the notice might be viewed as a ‘legal process’ at all, it is logically a process against the sub-tenant, not the company. As seen in Chapter 3, a disclaimer of a headlease by a liquidator will also determine a sub-lease, subject to the sub-tenant’s right to apply to court for an order vesting the disclaimed property (ie the headlease) in the sub-tenant, or to remain in the premises anyway on continuing to pay the headlease rent and performing the headlease covenants. This will mean that the landlord is no longer then able to recover rent from the sub-tenant who no longer wishes to remain in occupation. Similar considerations and scenarios arise in respect of the position of a sub-tenant where the tenant forfeits a headlease.

10.2.8.3  Effect of a CVA or Plan on guarantors Guarantees are likely to fall into two categories in practice: •

a guarantee provided by the company’s parent or another company in its group; and

•

a guarantee provided by a previous tenant under an AGA, or a guarantee of those obligations, usually provided by a fellow group company of that previous tenant, under a so-called ‘GAGA’.

As discussed in Chapter  8, it is legally possible for both a CVA and a Plan to compromise the liability of a guarantor as well as that of the company itself. Nevertheless, in the case of a CVA, the landlord may be able to show that they have been unfairly prejudiced by such a compromise (see, for example, Prudential Assurance Co Ltd v PRG  Powerhouse Ltd [2007]  BCC  500, as discussed in Chapter 8). A landlord might similarly be able to oppose the sanction of a Plan which seeks also to compromise the liabilities of a guarantor, particularly if this would leave them in a worse position than they would be under the relevant alternative. Neither a CVA or a Plan will compromise the liabilities of a guarantor automatically, however. This has already been discussed in Chapter  8 in relation to a CVA. In Oceanfill Limited v Nuffield Health Wellbeing Limited and Cannons Group Limited [2022]  EWHC  2178 (Ch), a landlord whose rights against Virgin Active Limited were compromised by that company’s Plan obtained judgment in respect of rent arrears against a former tenant and its guarantor under an AGA and a GAGA given 20 years prior to the Plan. The claims under the AGA and GAGA has not been automatically released by the Plan as a result of a compromise of the company’s liabilities as a tenant. In addition, in the present case, the Plan could not possibly have satisfied the requirements in the AGA and the GAGA that any release of the defendants’ liabilities needed to be granted under seal. The court was unpersuaded that it should nevertheless release the defendants due to the fact that they might otherwise seek reimbursement of sums they had paid to the landlord from the company (a so-called ‘ricochet claim’) which would undermine the effect of the compromise in the Plan. 281

10.3  Other special types of creditor

10.3 EMPLOYEES 10.3.1 Overview An employee’s rights will also depend to an extent on the insolvency process which their employer has entered into. Their concerns are likely to include the following: •

Will their employment be terminated, and if so what claims will they have?

•

To what extent will they be able to recover any sums which are already due to them, or which may become due as a result of the termination of their employment?

•

If their employment continues during the formal insolvency process, will any ongoing salary due to them be paid?

•

If the company’s business is sold, will they be able to recover anything due to them from the buyer?

The relevant legislation here includes: •

the Employment Rights Act 1996 (‘ERA 1996’);

•

the Trade Union and Labour Relations (Consolidation) Act 1992 (‘TULRCA 1992’); and

•

the Transfer of Undertaking (Protection of Employment) Regulations 2006 (‘TUPE’).

This section summarises the relevant considerations where the employee is employed in England by an English company. Note that where an employee is employed overseas by an English company, additional considerations may apply which are beyond the scope of this book.

10.3.2  Termination of employment 10.3.2.1  When will an employee’s contract be terminated? On a compulsory liquidation (technically, on the publication of the winding-up order), the employees are dismissed with immediate effect (Re General Rolling Stock Co, Chapman’s case (1866)  LR  1 Eq 346). Thus even the directors’ contracts of employment are terminated (Fowler v Commercial Timber Co Ltd [1930] 2 KB 1), although the directors’ other duties continue. Should the liquidator decide to carry on the business, the liquidator and the employee may agree that the latter’s employment continues (Re English Joint Stock Bank, ex parte Harding (1867) LR 3 Eq 341). In contrast, the employees are not automatically dismissed on a voluntary liquidation (Midland Counties District Bank Ltd v Attwood [1905] 1 Ch  357). In practice, however, if the liquidator ceases to carry on the business, their employment will also cease (Reigate v Union Manufacturing Co (Ramsbottom) Ltd [1918] 1 KB 592 at 606). Neither administration (see Powdrill v Watson [1995] 2 AC 394 at 448F), nor a CVA, a Plan or a Part A1 Moratorium will automatically terminate the employment of the company’s employees. This would be inconsistent with the functions of these processes as ’rescue‘ procedures. 282

Other special types of creditor 10.3 Receivership will not normally terminate employment, except in certain special circumstances (Griffiths v Secretary of State for Social Services [1974] QB 468). However, even where employees are not automatically dismissed, the insolvency officeholder may well need to dismiss some, and possibly all of the employees. The considerations which will apply if a sale subsequently occurs are discussed in Section 10.3.5.

10.3.2.2  Claims for termination of an employment contract The claims which an employee may have on termination of their employment contract may include the following: •

Statutory redundancy pay. To qualify the employee must have had two years’ continuous service, and the amount of the payment will depend on the numbers of years’ employment, the employee’s age, and their weekly wage prior to dismissal.

•

Wrongful dismissal. An employee may bring a wrongful dismissal claim if the employer terminates the contract in breach of its terms, for example, by failing to give the required contractual period of notice. The most common wrongful dismissal claim is for unpaid notice pay.

•

Unfair dismissal. An employee who has had sufficient continuous service has a statutory right not to be unfairly dismissed (s  94  ERA  1996). What is sufficient depends on the employee’s start date – those who started on or after 6 April 2012 need two years’ service, while those whose employment began before that date only require one year’s service (s 108 ERA 1996). An employee may bring a claim of unfair dismissal (in addition to any wrongful dismissal claim) if the employer has breached this right, for example, by failing to carry out a proper individual redundancy consultation of employees prior to their dismissal. An unfair dismissal award is comprised of a basic award, currently capped at £14,670, and a compensatory award, currently capped at £80,541, although both of these caps are reviewed annually. The compensatory award is based on the employee’s losses.

An employee cannot recover both a statutory redundancy payment and a basic award for unfair dismissal in respect of the same dismissal.

10.3.2.3  Awards for breach of the duty to consult The employer has a statutory obligation to consult collectively with employee representatives where it proposes to dismiss 20 or more employees at one establishment in a period of 90 days or less (s 188 TULRCA 1992). The minimum consultation period is 30 days where 20 to 99 redundancies are proposed, and 45 days where the number of redundancies will be 100 or more. If the employer fails to do so, then the employee representative may complain to an employment tribunal, which may make an award, termed a ‘protective award’, of up to 90 days’ pay per employee (s 189 TULRCA 1992). In an insolvency scenario, this duty to consult may well be at odds with other requirements and thus the consultation period will often be truncated. Section 188(7)  TULRCA  1992 provides that, where there are special circumstances 283

10.3  Other special types of creditor which render it not reasonably practicable for the employer to comply with the consultation requirements, the employer should take all such steps towards compliance with those requirements that are reasonably practicable in those circumstances. Insolvency can be a special circumstance, although it is not automatically so. In AEI  Cables Limited v GMB  [2013]  UKEAT/0375/12 the Employment Appeal Tribunal held that it was unreasonable to expect an employer to trade whilst insolvent just to enable it to comply with its obligations under s 188 TULRCA 1992 and treated this as a reason to reduce the award. The case of USDAW  v WW  Realisation 1 Ltd (in Liquidation) (C  80/14) [2015]  IRLR  577 further illustrates the operation of s  188  TULRCA  1992. Woolworths Plc went into administration at the end of November 2008 and traded for about a month whilst the administrators tried unsuccessfully to find a buyer. At the end of this period, all 814 shops were closed and all 28,000 or so employees made redundant. The administrators provided relatively little information to union and employee representatives, but did hold a meeting in mid-December at which they explained what would occur if no buyer could be found. The Employment Tribunal regarded this consultation as inadequate to comply fully with the legislation: the fact that the employer considered fuller consultation to be futile did not excuse the failure to consult. However, the Tribunal was willing to regard the stores as separate establishments and made no protective award in respect of stores with fewer than 20 employees. Despite the arguable inconsistencies between the UK legislation and the EU Directive that underpins it, the decision to treat each store as a separate establishment was upheld when the case was referred to the ECJ. Although there were previous ECJ decisions which suggest that the concept of establishment should be interpreted broadly to minimise the number of redundancy exercises that are not covered by the collective obligations (see Rockfon A/S v Specialarbejderforbundet I Danmark [1996] IRLR 168 and Athinaiki Chartopoiia AE v Panagiotidis [2007] IRLR 284), the ECJ was prepared in this case simply to note that an establishment is the unit or entity to which the relevant workers are assigned to carry out their duties. That will usually be a single specific workplace, but might in some circumstances encompass a wider grouping.

10.3.2.4  The effect of the administration moratorium The employee will need to establish their entitlement to any wrongful dismissal, unfair dismissal or protective award, and potentially also to a redundancy payment, which would normally require their claim to be heard by an employment tribunal. Applications to an employment tribunal will be subject to the administration moratorium (see Chapter 4). However, proceedings started without consent are not a nullity – they are simply stayed pending the court granting its permission (Carr v British International Helicopters [1993] BCC 855). In Unite The Union, McCartney and others v Nortel Networks UK Ltd (in admini­ stration) [2010]  EWHC  826 (Ch), a number of employees sought the permission of the court to continue claims for protective awards, unfair dismissal, breach of contract, unpaid expenses claims and discrimination claims. The administrators subsequently gave consent for the employees to continue the protective award claims on the basis that, if the claims (which were being contested) were successful, the employees would be able to apply to the Government for the statutory element of 284

Other special types of creditor 10.3 such award and thus receive money quickly (see Section 10.3.3.2). However, they continued to withhold consent to their continuing the other claims. Amongst other things, the employees raised arguments that the claims needed to continue to be litigated since, until a judgment was obtained, they were not provable debts. The court refused permission to continue the claims, as it was satisfied that they were provable (and could be resolved by the insolvency officeholder).

10.3.2.5  The statutory duty to inform BEIS In addition to the statutory duty to consult (referred to in Section 10.3.2.3), an employer proposing to dismiss as redundant 20 or more employees at one establishment within a period of 90 days or less also has a second statutory duty under s 193 TULRCA 1992 to inform the Secretary of State for Business, Energy and Industrial Strategy (BEIS) in writing of its proposal. The minimum notice periods for this are the same as for the duty to consult described above. There is a prescribed form for this purpose, designated a ‘Form HR1’. Where an employer fails to give the required notice under s  193, ‘any director, manager, secretary or other similar officer of the body corporate, or any person purporting to act in any such capacity’ may face criminal prosecution as well as the employer itself (s 194 TULRCA 1992). In 2015, BIS (the predecessor of BEIS) brought its first prosecution against three directors of City Link Limited (BIS v Smith, Peto and Wright, a decision of Deputy District Judge David R Goodman in the Coventry Magistrates’ Court, 13 November 2015). This marked a new, aggressive approach by BIS. It has been suggested that this partly represents a censure for officers who similarly fail to comply with the requirements of s 189 TULRCA 1992, as this can cause the responsibility for meeting ensuing protective awards to fall on the government (see Section 10.3.3.2). The prosecution accepted that the directors never made an overt decision or proposal to make its employees redundant. However, the judge agreed that the test was that any plan where dismissals would inevitably, or almost inevitably, result would amount to a proposal to dismiss employees, provided the plan was fixed as a clear, albeit provisional, intention. The prosecution argued that on this basis such a proposal was made when the directors made a decision that City Link Limited would be placed into administration. The fact that this decision was made only two days prior to the date on which the company then entered into administration was immaterial. The directors’ decision meant that they had then had a duty to file a Form HR1 and they failed to do so. In the event, the judge held that, at the time the decision was made to place the company into administration, the directors retained a genuine and reasonable belief that City Link’s business could be sold by the administrators (notwithstanding that no business sale had ultimately occurred), and that as such there had been no ‘proposal’ to dismiss employees. This decision may be of some help to future directors facing the same fact pattern, although such directors would be well advised to retain good, contemporaneous evidence of their thinking. In R  (on the application of Palmer) v Northern Derbyshire Magistrates’ Court [2021] EWHC 3013 (Admin), the court confirmed that a prosecution could be brought against an administrator for failing to give notice under s 193 TULRCA 1992 as an administrator was an officer of the company for the purposes of s 194. 285

10.3  Other special types of creditor

10.3.2.6  Other considerations The termination may, however, also release the employee from any restrictive covenants contained in the contact.

10.3.3  Unpaid remuneration and sums due following termination of employment 10.3.3.1  When will these be a preferential debt? The first £800 of an employee’s claim for unpaid remuneration in respect of any part of the period of up to four months prior to the date of the insolvency will be a preferential debt. The status of a preferential debt is explained in Chapter 2. For these purposes, the term ’remuneration‘ includes: •

wages or salary;

•

guarantee payments under Part III ERA 1996 (employee without work to do);

•

any payments for time off for ante-natal care or to look for work or arrange training (under ss 53 and 56 ERA 1996, respectively) or to carry on trade union duties (under s 169 TULRCA 1992);

•

remuneration on suspension on medical grounds or on maternity grounds under Part VII ERA 1996; and

•

remuneration under a protective award under s 189 TULRCA 1992.

A  claim for unpaid holiday remuneration relating to any period prior to the insolvency is also a preferential debt, and this is not subject to any cap. So far as the balance of any unpaid remuneration is concerned, however, the employees will only be ordinary unsecured creditors. They will also be ordinary unsecured creditors in respect of any debts which do not have preferential status, such as redundancy, unfair dismissal awards, and damages for wrongful dismissal.

10.3.3.2  What can the employee claim from the government? The government recognises that, if they were to need to wait to be paid out of an insolvency, an unpaid employee may receive little or nothing, and even if there were enough assets to allow them to recover at least something, they would still have a considerable time to wait. There is therefore a scheme whereby an employee of an insolvent company whose employment has been terminated may apply directly to the Redundancy Payments Office (the ‘RPO’) to recover certain sums from the National Insurance Fund (the ‘NIF’) (s  182  ERA  1996). For these purposes, a company is insolvent if it is in liquidation, administration, receivership or a CVA, or if possession has been taken of any of its property by a secured creditor holding a floating charge over that property (s 183(3) ERA 1996). A company will also be insolvent under s 183(4ZA) ERA 1996 if: •

a request has been made for the first opening of collective proceedings: (i) based on the insolvency of the employer, as provided for under the law of any part 286

Other special types of creditor 10.3 of the United Kingdom; and (ii) involving the partial or total divestment of the employer’s assets and the appointment of a liquidator or a person performing a similar task; and •

any of (i) a court; (ii) a meeting of creditors; or (iii) the creditors by a decision procedure has decided to open the proceedings.

As a result, a company which is the subject of a Restructuring Plan would almost certainly also be ‘insolvent’ for these purposes (see Re Gategroup Guarantee Ltd [2021] EWHC 304 (Ch)). The sums recoverable under this scheme include: •

up to eight weeks’ arrears of pay, subject to a limit (currently £571 per week), which includes the same items that were described as ‘remuneration’ in Section 10.3.3.1 (s 184(1)(a) ERA 1996);

•

up to 12 weeks’ unpaid notice pay, subject to a limit (currently £571 per week) (s 184(1)(b) ERA 1996);

•

up to six weeks’ unpaid holiday pay accrued during the 12-month period prior to the insolvency, subject to a limit (currently £571 per week) (s  184(1)(c) ERA 1996); and

•

the basic award of compensation for unfair dismissal (currently £17,130) (s 184(1)(d) ERA 1996).

These limits are reviewed annually. Statutory redundancy payments are also recoverable from the NIF under s 166 ERA 1996. Finally, certain unpaid contributions to an occupation or personal pension scheme are recoverable from the NIF. Besides the limits described above, tax and national insurance will still be deducted from payments to the employees where appropriate. So far as any claim for pay in lieu of notice is concerned, the employee will still need to mitigate their loss by claiming benefits and attempting to seek new employment. However, subject to all of these considerations, the employee should at least receive their payments within about four to six weeks of making their claim. A copy of an easy-to-follow booklet setting out more details of this scheme can be found on the Insolvency Service website (www.insolvency.gov.uk).

10.3.3.3  What is the interaction between the above two claims? If it makes a payment, the NIF will then be able to claim a like sum back in the insolvency in place of the employee. So far as the employee is also making a claim for any balance they have still not received, the two will rank on a pro rata basis in respect of any payment received. For example, say an employee is normally paid £771 per week, and is owed one week’s wages at the date of the insolvency. They will receive £571 from the NIF. They will claim the remaining £200 in the insolvency, and the NIF will claim £571. Because the combined sum of £771 which they are both owed is less than £800 in total, both claims will fully rank as preferential. If then, for example, there are 287

10.3  Other special types of creditor sufficient assets to repay preferential creditors at 50 pence in the pound, the employee will then receive £100 from the insolvency (in addition to the £571 they received from the NIF) and the NIF will receive £285.50 (as a partial recovery of the £571 it paid out).

10.3.3.4  What happens when the employee is also a director or controlling shareholder? It was once thought that the controlling shareholder of a company could not make a claim as an employee on the NIF. However, it appears now that they are not precluded from making such a claim if they still have a written contract of employment with the company and that contract actually gave rise to a genuine employer–employee relationship (Secretary of State for Trade and Industry v Bottrill [1999]  ICR  592 and Clark v Clark Construction Initiatives Ltd [2008] ICR 635). The same principle should apply to a director. Table 10.2 – Status of employee claims on formal insolvency Employment claim

Preferential debt?

Payable out of NIF?

Arrears of pay

Yes – for up to four months before date of formal insolvency, up to a maximum of £800.1 Includes: • guarantee payments; • remuneration on suspension on medical or maternity grounds; • payments for time off on certain grounds; • remuneration under a protective award

Yes – for up to eight weeks at up to £571 per week. Includes: • guarantee payments; • remuneration on suspension on medical or maternity grounds; • payments for time off on certain grounds; • remuneration under a protective award

Holiday pay

Yes – for accrued holiday remuneration relating to any period of employment before date of formal insolvency

Yes – for up to six weeks at up to £571 per week for holiday taken but not paid in 12 months before date of formal insolvency

Notice pay

No

Yes – for up to 12 weeks’ unpaid notice pay at up to £571 per week

Statutory redundancy pay

No

Yes – for statutory entitlement

Unfair dismissal

No

Yes – for basic award

Employer pension contributions

12 months (limited to contractedout percentage) to occupational pension scheme only

12 months (limited to 10% of payroll) to occupational or personal pension scheme

Employee pension contributions (if deducted from pay)

4 months to occupational pension scheme only

12 months to occupational or personal pension scheme

1  Except in the case of a protective award.

10.3.3.5  Other considerations In practice, the directors of a company may be advised that there could be wrongful trading issues should the remuneration of employees falling due between the critical date and the date the company eventually enters into the formal insolvency remain unpaid. The fact that employees may recover some or all of the sums due to them 288

Other special types of creditor 10.3 from the NIF does not in itself reduce the overall figure for the loss, given that the Crown steps into the employees’ shoes. The directors may therefore make special arrangements to ensure that the employees’ remuneration for any such period can be paid.

10.3.4  Ongoing wages or salary 10.3.4.1 Administration Wages or salary payable under a contact of employment adopted by the administrator enjoy a ‘super-priority’ status. They are payable in priority even to the administrator’s remuneration and general expenses. An administrator may be deemed to have adopted a contract of employment if they retain the employee in question for more than 14 days. However, the Court of Appeal made it clear in Re Debenhams Retail Limited (in administration) [2020]  EWCA  Civ 600 that adoption will not occur automatically. The administrator’s conduct is relevant here. If the administrator has taken active steps to continue workers’ contracts of employment that necessarily constitutes adoption and results in the relevant wages or salary gaining super-priority but if the administrator has done nothing that will not necessarily constitute adoption by default. The legislation makes it clear that this super-priority status does not apply to wages or salary relating to the period prior to the administrator’s appointment. In addition, if the administrator decides to terminate an employee’s contract within the first 14 days they will gain no super-priority status (para 99(5) Sch B1 IA 1986). Under para 99(6) Sch B1 IA 1986, wages or salary includes: •

a sum payable in respect of a period of holiday, in lieu of holiday, or in respect of a period of absence or other good cause;

•

in respect of any period, a sum which would be treated as earnings for that period for the purposes of any enactment about social security; and

•

a contribution to an occupational pension scheme.

In practice, an administrator is likely to pay employees who are needed during the administration on an ongoing basis in any case, if funds permit. The courts have made it clear that the following do not amount to wages and salary for these purposes and therefore do not enjoy super priority status: •

redundancy payments and unfair dismissal awards (Re Allders Department Stores Ltd [2005] BCC 289);

•

protective awards made under s  188  TULRCA  1992 (Re Huddersfield Fine Worsteds Ltd, Re Ferrotech Ltd and Re Granville Technology Group Ltd [2005] BCC 915); and

•

wrongful dismissal awards (Re Leeds United Football Club Ltd [2008] BCC 11).

10.3.4.2  Administrative receivership Similar provisions to the above apply in relation to an administrative receiver. Unlike an administrator, however, a receiver is deemed to be personally liable on a contract 289

10.3  Other special types of creditor of employment adopted by them. In this respect, they are entitled to an indemnity out of the assets of the company (s 44 IA 1986).

10.3.5  Recovery from a buyer 10.3.5.1  What are the normal rules? TUPE applies when there is: •

a transfer to another person of an undertaking, business or part of an undertaking or business;

•

which was situated immediately before the transfer in the UK; and

•

which involves a transfer of an economic entity that retains its identity.

The term ‘economic entity’ here is defined to mean an organised grouping of resources which has the effect of pursuing an economic activity, whether or not that activity is central or ancillary. In practice, therefore, TUPE applies to a sale of a UKbased business as a going concern. Under reg 4 TUPE, on such a sale the contracts of employment of the employees of the business, and all of the rights, powers, duties and liabilities under or in connection with such contracts transfer to the buyer. Their contracts of employment are treated as if they had originally been made between the employee and the buyer and accordingly the employees will have no further claim against the seller. TUPE also applies in certain circumstances to changes of service provider, although this is less likely to be relevant in the insolvency context. In addition: • any variation of the contract of the employment will be void (reg 4(4) TUPE); and •

any employee dismissed (whether before or after the transfer) will be automatically treated as having been unfairly dismissed (reg 7 TUPE), resulting in a liability to the buyer,

if the sole or principal reason for the variation or dismissal was the transfer, unless: •

the sole or principal reason was an economic, technical or organisational (‘ETO’) reason entailing changes in the workforce and (in the case of a variation) the employer and employee agree the variation; or

•

(in the case of a variation) that variation is permitted by the terms of the employment contract.

Changes to collective agreements, or to terms in individual contracts of employment that are incorporated by virtue of a collective agreement, are dealt with separately. The situation can be complicated where an insolvency officeholder has dismissed employees shortly before an eventual sale. In practice, in determining whether a dismissal was for an ETO reason, employment tribunals have taken into account factors such as: •

whether the reason was connected with the future conduct of the business as a going concern (although the fact that streamlining the business may make it 290

Other special types of creditor 10.3 more attractive generally to a buyer will not automatically mean that TUPE applies); •

whether there was any collusion between the insolvency officeholder and the buyer; and

•

whether the insolvency officeholder had funds to carry on trading at the time of the decision to dismiss.

(See, for example, Thompson v SCS Consulting Ltd [2001] IRLR 801, EAT.) Each case will be specific to its own facts, but by way of example: • In Spaceright Europe Limited v Baillavoine [2011] EWCA Civ 1565, the Court of Appeal was satisfied that the dismissal of a company’s chief executive officer on the date of the administrators’ appointment was connected with a sale of the business a month later, even though no buyer has been identified at the time of the dismissal, and was not justified by an ETO reason. The CEO occupied a unique role which would be surplus to the requirements of any likely buyer, and his high salary might also have caused a buyer difficulties. •

By way of contrast, in Crystal Palace FC Ltd v Kavanagh [2013] EWCA Civ 1410, the administrator had already identified a buyer for both the club and its stadium but slow progress on the stadium sale had in turn delayed the sale of the club. As the administrator could not afford to pay the staff in the meantime, he decided to limit the club’s out-of-season activities and made 29 staff redundant. The Court of Appeal held that this was for an ETO reason, drawing a distinction between an administrator’s immediate need to dismiss staff to reduce the ongoing wage bill and his longer-term objective of a sale.

10.3.5.2  Specific exceptions applying to insolvency sales Certain special provisions have been introduced in relation to insolvency sales, as it was perceived that potential buyers might otherwise be deterred by the level of obligations to employees they would need to take on. •

If the company is under bankruptcy proceedings or any analogous insolvency proceedings instituted with a view to the liquidation of its assets under the supervision of an insolvency practitioner (described here as ‘liquidation proceedings’), the transfer and dismissal provisions in regs 4 and 7 of TUPE, respectively, will not apply (reg 8(7) TUPE).

•

If the company is under insolvency proceedings under the supervision of an insolvency practitioner which were not instituted with a view to the liquidation of its assets (described here as ‘non-liquidation proceedings’), regs 4 and 7 of TUPE will apply generally. However, the obligation to pay those pre-existing debts which would have been recoverable under the NIF guarantee scheme under ERA 1996 had there been no transfer remain with the seller and are still recoverable from the NIF as if the employment had been terminated on the date of the transfer. The buyer will only be liable for the balance of any pre-existing debts (regs 8(2) to 8(6) TUPE).

•

In addition, if the company is in non-liquidation proceedings, the buyer may impose new employment terms on a transferred employee provided that, among other things, the variation has been agreed with an employee representative and is made with the intention of safeguarding employment (reg 9 TUPE). 291

10.4  Other special types of creditor The wording of TUPE was taken from the relevant EC Directive, and does not attempt to classify the various formal insolvency processes discussed in this book as either liquidation proceedings or non-liquidation proceedings. The DTI, a predecessor to BEIS, issued its own guidance (‘Redundancy and Insolvency Payments’, URN 06/1368), which is summarised in Table 10.3. Although this guidance is not authoritative, in Key2Law (Surrey) LLP v De’Antiquis [2011] EWCA Civ 1567 the Court of Appeal held that any administration will be a non-liquidation proceeding, thus resolving a conflict between two earlier Employment Appeal Tribunal decisions. Table 10.3 – Summary of guidance (‘Redundancy and Insolvency Payments’, URN 06/1368) Proceeding

Category

Compulsory liquidation

Liquidation proceedings

Creditors’ voluntary liquidation

Liquidation proceedings

Members’ voluntary liquidation

Not insolvency proceedings at all, so TUPE applies normally

Administration

Non-liquidation proceedings

CVA

Non-liquidation proceedings

Administrative receivership

Non-liquidation proceedings

Other types of receivership

Not insolvency proceedings at all, so TUPE applies normally

Proceedings in other jurisdictions where a relevant transfer occurs in Great Britain

Necessary to consider whether they are analogous to liquidation proceedings – if so, they are treated as such

10.4  PENSION SCHEMES 10.4.1 Overview If the employer under an occupational defined benefit pension scheme enters into formal insolvency, this is likely to crystallise a debt from the employer to the trustees of the scheme equal to the employer’s share of the amount by which the liabilities of the scheme exceeds the value of the scheme assets. This is sometimes termed the ‘section 75 debt’. The section 75 debt is deemed to crystallise immediately before a ‘relevant event’ occurs (s 75(4) Pensions Act 1995). The insolvency events listed in Table 10.4 are relevant events. As Table 10.4 shows, however, a number of other processes are excluded from this definition. The section 75 debt in relation to the whole scheme may also crystallise if a process occurs which is not an insolvency event as defined, but is nonetheless an event which triggers the wind up of the scheme under the scheme’s rules such as, for example, the insolvency of the ‘principal employer’ of the scheme. The principal employer is the entity with whom scheme powers are shared with the trustees under the scheme’s rules but need not be a sponsoring employer with direct obligations to fund the scheme. Given that the amount of the scheme’s liabilities is calculated on a full buy-out basis, ie by reference to the amount which an insurance company would charge to provide a policy securing the benefits payable under the pension scheme, the section 75 debt may be large. It is, however, normally an unsecured debt of the company (and 292

Other special types of creditor 10.4 indeed s 75 specifically states that it will not be preferential), although, in some cases, security may have been provided by the employer. Also, parent company guarantees and letters of credit are sometimes provided in respect of an employer’s section 75 debt which may be called upon. The insolvency event may also trigger the start of an assessment period which may lead to the pension scheme being transferred to the Pension Protection Fund (the ‘PPF’), as discussed in Section 10.4.2. In addition, the pensions regulator (‘TPR’) has the power to impose liabilities on others. Since this power is likely to be most relevant in a restructuring context, it is discussed in Chapter 11.

10.4.2  The role of the PPF 10.4.2.1  When will a pension scheme enter into the PPF? The scheme must be eligible for the PPF. Whilst most defined benefit schemes will be eligible there are certain exceptions, although discussion of these is beyond the scope of this book. If a qualifying insolvency event occurs in relation to the employer of an eligible scheme then an assessment period will automatically begin. For these purposes, any of the insolvency events listed in Table 10.4 will be ‘qualifying’ insolvency events. An assessment period starting freezes the wind-up of the scheme unless TPR exercises its powers to order that wind-up (ss 135(2) and (3) Pensions Act 2004). During the assessment period, the PPF seeks to ascertain: •

whether the scheme can be rescued (eg if the company is able to continue as a going concern); or

•

whether the scheme can afford to secure benefits which are at least equal to the compensation that the PPF would pay if it assumed responsibility.

If either of the above is possible, the PPF will cease to be involved with the scheme. It will otherwise assume responsibility for the scheme from the end of the assessment period. Table 10.4 – Insolvency events under s 121 Pensions Act 2004 and reg 5 Pension Protection Fund (Entry Rules) Regulations 2005 Insolvency events: •

a nominee submitting a report for a CVA;

•

an administrative receiver being appointed;

•

the company entering administration;

•

a resolution being passed for voluntary liquidation without a declaration of solvency under s 89 IA 1986 (ie for a CVL);

•

an MVL being converted into a CVL under s 96 IA 1986;

•

a winding-up order being made by the court;

•

an administration order being made by the court in respect of the company by virtue of any enactment which applies Pt 2 IA 1986 (administration orders) (with or without modification);

•

a notice from an administrator under para 83(3) Sch B1 IA 1986 Act (moving from administration to CVL) being registered by the Registrar of Companies;

•

the company moving from administration to liquidation pursuant to an order of the court under r 21.3 IR 2016; or

293

10.4  Other special types of creditor •

an administrator or liquidator of the company, being the nominee in relation to a proposal for a CVA, summoning meetings of the company and of its creditors to consider the proposal, in accordance with s 3(2) IA 1986.

Events which are not insolvency events: •

a resolution being passed for a voluntary liquidation with a declaration of solvency (ie for an MVL);

•

the appointment of a provisional liquidator;

•

the appointment of a non-administrative receiver;

•

commencing a Part A1 Moratorium;

•

proposing or entering into a Scheme of Arrangement or Restructuring Plan;

•

entering a non-UK insolvency process.

The assessment period is likely to last for at least a year, and during this period the trustees of the scheme retain responsibility for the administration of the scheme and for communicating with and making pension payments to scheme members. However, the PPF will have a monitoring role, and can give directions to the trustees. In practice, the PPF encourages that an independent trustee (selected from the PPF’s preferred panel of advisers) is appointed as soon as possible during the assessment period. The PPF will also liaise with any insolvency officeholder. Importantly, from an insolvency context, the rights and powers of the trustees in relation to any section 75 debt (including any contingent section 75 debt) or any other debt due are exercisable by the Board of the PPF during an assessment period (s  137 Pensions Act 2004). Pensions will be restricted to PPF compensation levels during any assessment period. The scheme’s recoveries in respect of the section 75 debt, either in the insolvency or pursuant to any third-party guarantees, will often be critical here.

10.4.2.2  What level of compensation does the PPF provide? Broadly speaking, the PPF provides two levels of compensation, based largely on a member’s age at the time of the assessment date: •

members who had already reached the scheme’s retirement age (or had not reached the scheme’s retirement age but were already receiving a survivor’s pension or a pension on the grounds of ill-health) receive a starting level of compensation equal to 100% of the pension already in payment; and

•

other members who had not already reached the scheme’s retirement age receive compensation of 90% of the pension the member had accrued prior to the assessment date, revalued in line with the increase in the consumer price index between the assessment date and the date when the compensation first becomes payable.

There was until recently also an overall cap on the compensation payable to this second category of members, which depended on the member’s age when the compensation first became payable. However, the cap no longer applies as the Court of Appeal has determined it to be unlawful age discrimination (Secretary of State for Work and Pensions and the Board of the Pension Protection Fund v Hughes [2021] EWCA Civ 1093). In addition, as result of an earlier ruling of the European Court of Justice in Hampshire v The Board of the Pension Protection Fund [2018] (Case C-17/17), the PPF was already required to pay a minimum level of compensation corresponding to at least 50% of that member’s accrued entitlement under the scheme, but following 294

Other special types of creditor 10.5 the removal of the cap it seems unlikely that members would need now to rely on this earlier decision. Once compensation is in payment to a member, any part of the compensation which derives from pensionable service on or after 6 April 1997 will be increased each year in line with increases to the consumer price index, subject to a cap of 2.5% in any year. This may be a lower rate of increase than the scheme itself would have provided.

10.4.2.3  Part A1 Moratoriums and Restructuring Plans Despite the fact that neither commencing a Part A1 Moratorium nor proposing a Restructuring Plan will be a qualifying insolvency event, certain considerations will still apply in relation to these two procedures for a company which is or has been, an employer in respect of a defined benefit pension scheme. As soon as reasonably practicable after the directors notify the monitor that a Part A1 Moratorium for a company comes into force, the monitor must in turn notify TPR and, in the case of an eligible scheme, the PPF (s A8 IA 1986). Similarly, where a Restructuring Plan is proposed, any notice or other document required to be sent to a creditor must also be sent to TPR and, in the case of an eligible scheme, the PPF (s 901I CA 2006). The PPF will also be entitled to exercise the rights of the trustee or managers of an eligible scheme as if the PPF were a creditor of the company in its own right. Ordinarily, the Board’s ability to exercise those rights will not prevent the exercise of the same rights by the trustees or managers. However, where the PPF is exercising the right: •

to vote in respect of an extension of a Part A1 Moratorium under s A12 IA 1986 or to challenge the directors’ actions in relation to such a moratorium under s A44(4)(c) IA 1986; or

•

to vote on a Restructuring Plan in a meeting summoned under s 901C(1) CA 2006

the trustees or managers will be excluded from exercising these rights, although the PPF must consult with the trustees or managers before exercising them itself (see paras 2 and 3 of the Pension Protection Fund (Moratorium and Arrangements and Reconstructions for Companies in Financial Difficulty) Regulations 2020 (SI 2020/693)).

10.5  RETENTION OF TITLE CREDITORS 10.5.1 Overview Under s 19 Sale of Goods Act 1979, title passes when the parties intend it to pass. It is therefore open to a supplier to agree with the company that, notwithstanding that it may have delivered goods to the company, it remains the owner of the goods until the company has paid for them. A clause to this effect is generally termed a retention of title, or ‘RoT’, clause. This can not only give a supplier the ability to recover from the company any goods to which it has retained title, but also a possible action for damages for conversion against an insolvency officeholder personally if they sell such goods without the supplier’s authority. 295

10.5  Other special types of creditor The supplier will need to: •

establish that its RoT claim is valid; and

•

remove the company’s other rights in respect of the goods.

In many cases, the supplier may well not wish to have its goods back and would prefer instead to negotiate payment of at least some of what it is owed, but the above issues will still be relevant so that it can maintain its bargaining position.

10.5.2  Establishing valid RoT 10.5.2.1  Are the RoT provisions effective? Generally, a clause which provides that title to the goods remains with the seller until a payment is likely to prove effective. Examples of ineffective clauses, however, have included: •

a clause which attempted to retain title to both to the goods supplied and to the end product from a manufacturing process in which the goods themselves have lost their identity (eg Borden (UK) Limited v Scottish Timber Products Ltd [1981] Ch 25); and

•

a clause which attempted to retain title to the goods and their proceeds of sale (eg Re Andrabell Ltd [1984] 3 All ER 407).

The above examples illustrate the danger of going too far in drafting an RoT provision. In both of the above examples, the clauses were held to be void in their entirety as they amounted to unregistered charges, In some cases, however, the courts have been willing to sever the possible void part of the provision and hold that the remainder of the clause is effective (eg Clough Mill Ltd v Martin [1985] 1 WLR 111). It is not absolutely necessary that the contract contain a clause expressly reserving title provided that it is clear from the contract, construed overall, that the parties did not intend title to pass until payment. However, the supplier may have a harder task establishing this in the absence of an express RoT provision.

10.5.2.2  Has the RoT provision been incorporated into the contract? Normal principles of contract law apply in determining whether an RoT clause has been incorporated. This will not be an issue where the company has signed a written contract on the supplier’s terms before placing its order. However, the provision may not have been incorporated where: •

the company has its own set of terms and conditions and there is doubt as to which party’s terms and conditions apply (a so-called ‘battle of the forms’); or

•

the supplier’s terms and conditions only came to the company’s attention after the event, for example, because they appear only on the reverse of the supplier’s delivery notes or invoices (although this is less likely to be an issue if there has been a course of dealings between the parties for some time).

In Ghsp Inc v Ab Electronic Ltd [2010] EWHC 1828 (Comm), the court found that on the facts the parties had not contracted on either side’s terms and so the terms of the contract were those implied by the Sale of Goods Act 1979. 296

Other special types of creditor 10.5

10.5.2.3  Can the supplier still identify its goods? The RoT may remain effective even if the goods have been incorporated into some other product provided they have not lost their identity. In Hendy Lennox (Industrial Engines) Ltd v Grahame Puttick Ltd ([1984] 1 WLR 485) an engine, supplied on RoT terms, had been incorporated into a generator. However, it could be unbolted and removed, so the RoT still applied. The supplier may have difficulty, however, if the goods which it has delivered have been mixed in the company’s warehouse with similar goods supplied by other suppliers, making it difficult to recognise its own goods (eg Re London Wine Company (Shippers) Ltd [1986]  PCC  121). Nonetheless, in Re CKE  Engineering Ltd [2007] BCC 975, a supplier was effectively able to retain title to zinc supplied by it, notwithstanding the fact that this has been mixed in a tank with zinc supplied by other parties – it was held that that supplier owned an appropriate fraction of the total zinc in the tank.

10.5.2.4  Is it a simple or all-monies clause? A simple RoT clause provides that title to the goods is retained by the supplier until it has received full payment for those specific goods. An all-monies clause provides that title is retained until the company has paid not only for those specific goods, but also for any other goods supplied by the supplier to the company, and has paid or repaid any other moneys it owes to the creditor, regardless of how such indebtedness arose. A supplier with only a simple clause will need to relate specific goods at the buyer’s warehouse to specific unpaid invoices. An all-monies clause avoids this need.

10.5.3  Removing the company’s other rights Although the company may not yet have title to the goods, it will have possession of them and in the normal course of its business it can pass title on to a buyer in good faith who has no knowledge of the creditor’s RoT clause (s 25 Sale of Goods Act 1979). The supplier is therefore unlikely to be able to retain title to any goods once the company sells them on. In Sandhu (t/a Isher Fashions UK) v Jet Star Retail Ltd (in administration) [2011]  EWCA  Civ 459, for example, the contract allowed the supplier to require the company not to re-sell or part with possession of the goods until the company had paid the supplier all monies due to it. However, the supplier had in practice taken no steps to withdraw the company’s authority to do so. The supplier accordingly had no claim in conversion in respect of goods which had been sold by administrators following their appointment. The supplier will also wish to ensure that it retains the right to bring conversion proceedings against an insolvency officeholder who sells its goods, or indeed allows any other party to take possession of them. To succeed in a conversion claim, the supplier would need to demonstrate not only that it remains the owner, but that it has an immediate right to possession and that the insolvency officeholder committed a deliberate act of conversion, interfering with its rights to possession. A well-drafted set of terms and conditions will therefore remove the company’s right to possession of the goods and allow the supplier access to the company’s premises to identify and recover its goods once any one of a list of insolvency-related events occurs (although the supplier will need to check this). However, the supplier should 297

10.5  Other special types of creditor also contact the newly appointed insolvency officeholder as soon as possible to make the position clear. The case of Blue Monkey Gaming Ltd v Hudson [2014] WL  4355075 does show the possible pitfalls for a supplier hoping to use threat of a claim to conversion as a bargaining tool to negotiate a higher payment in settlement. The court held that a notice from the supplier to the company asking for the return of goods subject to retention of title was not a genuine demand, and that the supplier in reality wanted the goods to remain in situ so that it could do a deal. As such, it held that no conversion had taken place. If the supplier wishes to allow the company to retain possession for a period of time, it needs to make it clear on what terms it is doing so. In administration: •

the moratorium will still prevent the supplier from repossessing its goods without the consent of the administrator or the permission of the court (see Chapter 4). (The moratorium does not, however, preclude the supplier having an ‘immediate right to possession’ for the purposes of a conversion claim – Barclays Mercantile Business Finance Ltd v Sibec Developments Ltd [1992] 1 WLR 1253.)

•

the administrator has the power to apply to the court for an order allowing them to sell the goods, but only on terms whereby they pay the proceeds of the sale, and any shortfall required to make up the market price, to the supplier (see Chapter 4).

Otherwise, however, the insolvency officeholder (including any administrator who does not wish to apply to the court) will need to agree terms with the supplier if they wish to continue to sell the goods, or indeed to hand possession of them to a third party as part of a business sale.

10.5.4  Protections for the insolvency officeholder Under s 234(3) and (4) IA 1986 a liquidator, administrator or administrative receiver who seizes or disposes of any property which is not property of the company is not liable in respect of any loss or damage resulting if: •

they believed and had reasonable grounds for believing that they were entitled to seize or dispose of that property, and

•

the loss was not caused by their own negligence.

The case of Re Euromex Ventures Limited [2013]  EWHC  3007 (Ch) provides an example of this defence being successfully used. The Blue Monkey Gaming case also provides some useful guidance on what is expected of insolvency officeholders in practice.

298

Chapter 11

Restructuring

11.1 INTRODUCTION Chapter  1 gave a brief overview of the considerations involved in a restructuring, including some possible future changes to the statutory regime. This chapter considers the thinking involved in a restructuring more generally, and looks in particular at the following stages which might typically be involved in a successful restructuring process: •

identifying the problem and the relevant stakeholders;

•

creating a stable environment;

•

information gathering; and

•

assessing the restructuring options and implementing a solution.

For simplicity, this chapter takes as its model a restructuring of a group of Englishregistered companies with a structure which might typically exist after an acquisition financed with a mixture of debt and investment from a single major shareholder. A simple example of such a structure is shown in Table 11.1. In practice, the group structure may differ from this. It may also be that, for business, tax or other reasons, some of the companies in the group are overseas entities. Where one or more of the companies in the group is listed, or the debt itself is listed (eg following a securitisation), then this will create additional issues which are largely beyond the scope of this book. Nonetheless, much of the content of this chapter will still be generally applicable.

11.2  IDENTIFYING THE PROBLEM 11.2.1  What is the problem? For a successful restructuring to be achieved, the company, or group, must have a viable underlying business. In many cases it may not become clear whether this is the case until further work has been carried out. However, once the fundamental problem, or problems, the group is facing have been identified, the relevant stakeholders will be able to make a commercial judgement as to whether it is even worth carrying out further work. Groups encounter financial difficulties for a variety of reasons: •

the state of the economy generally;

•

problems exist in the group’s industry sector generally; and/or

•

problems exist which are specific to the group. 299

11.2  Restructuring Table 11.1 – Typical post-acquisition group structure

Clearly, if one or both of the first two factors are also present, these may exacerbate any problems the group already has. However, groups with viable underlying businesses may still encounter difficulties even in a benign economy where their competitors are thriving. Sources of difficulty which may not adversely affect the long-term viability of the business may include: •

an over-ambitious acquisition strategy;

•

flaws in the business model;

•

weaknesses in a senior management team;

•

an underperforming non-core business draining the core business;

•

loss of a major customer or supplier; and/or

•

increased cost of a defined benefit pension scheme, labour, utilities, or other key purchases.

It may be clear that a simple solution which does not require a fuller restructuring of debt or equity is available – see Section 11.2.3. However, more significant action is likely to be needed if the underlying problem means that in the medium to long term the group can no longer afford the cost of servicing its existing interest payments and/or principal repayments to its finance creditors.

11.2.2  What is the ‘trigger point’? There will usually be some clear point in time before which action needs to be taken. Such ‘trigger points’ might typically include: 300

Restructuring 11.2 •

the testing date for a financial covenant in the group’s credit facilities;

•

the date on which the group’s annual accounts needed to be signed off by the auditors;

•

the date on which the group’s credit facilities are due to be repaid;

•

the date by which a regulatory authority, such as the Prudential Regulation Authority (PRA) or the Financial Conduct Authority (FCA) in the financial sector or the Civil Aviation Authority (CAA) in the travel sector, is threatening to withdraw a licence or consent which the group needs to continue to trade unless action has been taken;

•

the date on which the operating subsidiaries in the group are forecast no longer to have sufficient cash to operate.

The existence of such a trigger point can be a virtue in one sense, in that it may concentrate stakeholders’ minds on the need to complete the whole restructuring by the date in question. However, if this cannot be achieved, interim solutions may need to be found.

11.2.3  Is a simple solution available? If it is immediately clear that the underlying problem derives from a one-off event or is otherwise not a serious one, it may not be necessary to carry out a more fundamental restructuring of the group’s debt or equity structure. Examples of simple solutions include: •

replacing underperforming senior management. Alternatively, where senior management have the skills to run a performing business but not to run a business in financial difficulties, another option is to add an experienced turnaround professional to the existing management team as a ‘Chief Restructuring Officer’ (or ‘CRO’);

•

resetting of financial covenants (or waiving of a breach deriving from a one-off problem);

•

a minor change in the dates for the payment of debt and/or interest by the existing lenders under a credit facility;

•

an injection of cash by a sole or majority shareholder by way of a subordinated loan or a cash subscription for further shares, or a rescue rights issue to a larger group of existing shareholders, to provide the group with the cash it needs to cure a financial covenant breach or cash-flow problem; and/or

•

raising cash by other means, for example by a sale of non-core assets or parts of the business or a sale and leaseback of freehold premises.

Groups and their stakeholders will tend to consider such options prior to deciding that more significant action is needed. However, in some cases, it may transpire that what was thought to have been a simple but permanent solution was only an interim solution. In practice, there will also be companies or groups of companies where a series of interim solutions are found to allow them to continue to meet ongoing payments on their existing debts, but where no more serious trigger point has yet emerged to force a more extensive restructuring. (These more serious trigger points are sometimes 301

11.3  Restructuring known as ‘burning platforms’.) Companies which are able to meet ongoing debt payments, but which are regarded as then having little surplus cash to develop their business without a fuller restructuring are sometimes referred to as ‘zombie companies’.

11.3  WHO ARE THE KEY STAKEHOLDERS? For a successful restructuring to be achieved, a sufficient number of the key stakeholders whose interests will be affected by the restructuring must support the process. These key stakeholders might include:

11.3.1 Shareholders Investor shareholders are likely to have considerably more day-to-day involvement with the business itself than the finance creditors. Their appointees may well sit as non-executive directors on the board of one or more of the group companies and provide considerable expertise. The shareholders are likely also to have strong links with the rest of the management, although it is also they who have the power to remove underperforming directors (in the absence of an enforcement of share security rights by a finance creditor). If the group is already insolvent on a balance sheet basis, its shares will retain no present value. Where creditors are asked to compromise their claims, they are likely therefore to expect shareholders also to make some new investment in any restructuring, or otherwise relinquish their existing shareholder rights.

11.3.2  Finance creditors 11.3.2.1  Identifying the relevant debt Some groups may have only a single lender. However, larger, more sophisticated groups may have two or more tiers of debt consisting of senior and, in descending order of priority, second lien, mezzanine, payment-in-kind (PIK) and/or other subordinated debt. Not all of these tiers of debt are commonly seen on ‘new money’ deals nowadays. Where they are seen, the companies borrowing, guaranteeing and granting security may differ – for example, PIK debt may be incurred by a holding company and mezzanine lenders will sometimes be granted security by companies higher in the group structure than those which contribute to the senior security package. If debt has been syndicated, there may be a number of different lenders from a range of financial institutions, funds and debt investors in each tier. Some of the tiers of debt may in turn be subdivided into more than one sub-tier. Unitranche facilities are also a popular method of financing. Unlike traditional senior/mezzanine structures, these involve a single term-loan facility documented in a single facility agreement (often accompanied by a super-senior revolving facility). Where there are two or more unitranche lenders participating other than on an equal basis, the rights of the unitranche lenders vis-à-vis one another are then governed by an ‘agreement amongst lenders’ (AAL), which divides the facility into a firstout tranche (which is similar to senior debt) and a last-out tranche (which operates 302

Restructuring 11.3 like mezzanine debt). The borrower is not, however, a party to the AAL. From the borrower’s perspective, the facility is made available to it in a single tranche with the AAL acting as an agreement behind the scenes between the lenders. If the group has issued bonds, these will form another tier of debt. Historically high yield bonds are likely to have been unsecured and this debt will therefore have formed part of the subordinated debt ranking behind that of secured lenders. However, other structures have become more commonplace, particularly where some of a group’s original debt has already been refinanced through the bond markets. Some or all of the bonds issued by a company may well also benefit from security. Such security may either consist solely of security granted by the issuer of the bonds (which is likely to be a special purpose vehicle set up for the specific purpose of issuing the bonds – its assets will therefore usually only consist of shares held by it in the underlying trading group and receivables owed by the group to the issuer pursuant to loans made by the issuer in order to down-stream the proceeds of the bond issue to the group), or it may include security from some or all of the issuer’s subsidiaries over their assets as well. The subordinated debt may also include debt due to shareholders, outstanding consideration due to the seller of the business from the existing owners and/or debt due to past or present management and will typically be recorded in the form of loan notes. This subordinated debt will not usually benefit from security.

11.3.2.2  Identifying where the value breaks The group of finance creditors who are likely to prove most active in any restructuring are those who would expect only to be partially repaid on a formal insolvency of the group. Colloquially, the value ‘breaks’ in their tier of debt. Finance creditors whose debt still sits above the value break can expect to be repaid in full, whereas finance creditors sitting below the value break would be repaid nothing and might therefore be less engaged; but their agreement may still be needed to achieve a consensual restructuring. Finance creditors whose debt sits just below the value break, are also likely to be fairly active, and are likely to scrutinise any valuations carefully. In addition, finance creditors who hold debt below the value break may also hold debt at a higher level, and try to use this as leverage.

11.3.2.3  Identifying who now holds the debt The picture will be complicated further if, since the debt was originally lent, all or part or it has been sold to other parties. Debt which is sold on in this way is known as ‘secondary debt’. Players in the secondary debt market may have bought debt, or acquired sub-participations in the debt, at a substantial discount – debt which is trading at a discount is known as ‘distressed debt’. These players may well have a very different agenda from the original finance creditors. They could still stand to make a positive return on the investment if the business is quickly broken up or sold. Alternatively, their primary objective may always have been a restructuring which converts that debt to voting shares or provides the means for them to enforce that debt, giving them control of the group – a so-called ‘loan to own’ strategy. Some investors may also purchase the debt in a company at a significant discount in order to attempt to frustrate a restructuring by ‘holding out’ (ie refusing to vote in favour of consents required under the underlying finance documents in order for the company 303

11.3  Restructuring to effect a restructuring) with a view to some or all of their debt being repaid by the borrower or their position bought out by the other lenders so that the restructuring can proceed. The first stage of a restructuring will often therefore require the group to identify which finance creditors now hold all of its debt. Where the group has issued bonds, this may be a particularly difficult exercise.

11.3.2.4  Identifying the rights of those creditors The rights of the finance creditors vis-à-vis each other will be important and will be set out in various documents, which the relevant stakeholders will also need to review. For example: •

A deed of priority, or inter-creditor agreement, to which all finance creditors will be a party, will set out the priority ranking of the various creditors, limit the rights of lower-ranking creditors to receive payments and/or to take their own enforcement actions, and stipulate what further actions the higher-ranking creditors can take without the consent of the lower-ranking creditors. It may also give lower-ranking creditors the right to buy out higher-ranking creditors at par in certain circumstances (such as where there has been a default in relation to the higher-ranking debt).

•

Individual facility agreements will stipulate how decisions are taken among the various lenders under that facility. Many lender decisions, for example to waive breaches of covenants, can be taken if a stipulated majority, normally more than 66⅔%, of those lenders by value of their commitments are in favour, but a decision to reduce the total debt due or to extend a repayment date is likely to require the unanimous consent of all of those lenders.

•

However, facility agreements often now contain a ‘super majority’ concept, whereby certain fundamental decisions such as ‘structural adjustments’ (which can include the introduction of a new facility or an increase to an existing facility) and the release of guarantees or security outside certain agreed parameters require the approval of lenders holding at least 85% of the commitments.

•

Most facility agreements also contain ‘yank a bank’ provisions whereby, if an amendment or waiver requires unanimous lender consent, and a high level of consent (typically, 85% or 90% of the value of all lenders’ claims) is achieved, but not unanimity, the borrower will have the option of replacing the dissenting lenders by forcing a transfer of their debt to another lender for par value.

•

Where bonds have been issued, the relationship between the individual bondholders will be governed by their own agreement – this is usually a ‘trust deed’ in respect of bonds issued under English law and an ‘indenture’ in respect of high-yield bonds which are issued under New York law (as is usually the case). In this case, however, it would be normal to allow for many bondholder decisions to be taken if more than 50% of bondholders by value are in favour, with even fundamental decisions requiring only super-majority, eg 75%, rather than unanimous consent. Where bonds are issued in different tranches, certain matters may require a vote in favour by the holders of a certain proportion of the bonds in each tranche, and certain other matters may require a vote in favour by a certain proportion of all holders voting together. 304

Restructuring 11.3

11.3.2.5  When will the courts intervene? The courts have occasionally needed to consider whether there are any restrictions on the ability of a majority of finance creditors to use these provisions to make decisions against the wishes of a dissenting minority: •

Some older cases, such as British American Nickel Corpn Ltd v O’Brien [1927]  AC  369, suggested that the majority must exercise such decisionmaking powers for the purpose of benefiting the whole.

•

However, the more recent case of Redwood Master Fund Ltd v TD Bank Europe [2002]  EWHC  2703 (Ch), where the court held that a relative disadvantage for the minority will not automatically mean that a majority power has been improperly exercised if it was exercised in good faith for the purpose for which it was conferred, probably better reflects modern commercial realities.

• In Re Kestrel Acquisitions Limited [2015]  EWHC  916 (Ch), the court was similarly unwilling to imply a term into a series of loan notes to the effect that the company was unable to modify the terms of those notes only where the amendment was made in good faith and for the benefit of the holders both of notes issued to new lenders and of notes issued to a seller in respect of deferred consideration. Nonetheless, the courts may still look unfavourably on arrangements which, as an inducement to support a proposal, seek either to confer an additional benefit on finance creditors voting in favour of that proposal, or a disbenefit on those abstaining or voting against it: • In Assénagon Asset Management SA  v Irish Bank Resolution Corp Ltd [2012] EWHC 2090 (Ch) the English court was unprepared to allow the use of an ‘exit consent’ technique, where bondholders who failed to support a resolution risked an expropriation of their bonds for a nominal consideration, on the basis that the resolution was not exercised in the best interests of the class of noteholders as a whole and was, therefore, oppressive and an abuse of the power of the majority to bind the minority. •

By way of contrast, however, in Azevedo v Importacao, Exportaacao e Industria de Oleos Ltda [2013] EWCA Civ 364 the Court of Appeal did hold that it was lawful for a company to offer an additional ‘consent’ payment to bondholders voting in favour of an amendment.

It should be noted also that the restriction on the use of exit consents only applies to bonds which are issued under English law (on the basis that English law forbids the suppression of a minority by a majority in such manner), and that similar practices in relation to high-yield bonds issued under New York law may still be permissible.

11.3.3  Other major creditors If one of the difficulties of the group is that it has an underfunded defined benefits pension scheme, it may be necessary to restructure this either as an exercise in itself or as part of a wider restructuring. Whilst the debt due to the pension scheme may be unsecured in the event of a formal insolvency (see Chapter 10), the trustees will be in a far better negotiating position than other unsecured creditors due to the special powers of the Pensions Regulator (‘TPR’). Pensions issues are discussed further in Section 11.8. 305

11.3  Restructuring The group may also be paying excessive rents on business premises, particularly where the underlying problem was an over-ambitious acquisition or expansion strategy, in which case the debts due to some of its landlords may need to be addressed. However, it is unlikely that most consensual restructurings will be carried out in a way which affects the trade creditors, employees or most of the other operational creditors of the group, for a number of reasons: •

the process creates uncertainty and risks the ability of the business continuing as a going concern;

•

key suppliers are likely to adopt ransom positions and refuse to trade further with the business, or supply it on less favourable terms going forwards as the cost of their consent;

•

a far larger number of parties might need to be involved in the restructuring process, many with very small claims, which they might be reluctant to compromise consensually; and

•

it would be virtually impossible to conduct such wide negotiations confidentially.

Indeed, even if a formal insolvency process is used as a restructuring tool to circumvent dissenting finance creditors and/or shareholders this will frequently take place at a holding company level and allow for trade creditors or employees to be paid in full (see Section 11.7.2.1). The introduction of the Restructuring Plan offers increased flexibility to bind dissenting trade creditors but even so it will be rare for a Plan to seek to bind all creditors. As discussed in Section 8.3.4.1, for example, although the Virgin Atlantic Airways Limited Plan sought to compromise trade creditors as well as finance creditors it excluded trade creditors who were owed less than a certain amount.

11.3.4 Management The other stakeholders are likely to wish to ensure that existing management are retained and incentivised as part of the restructuring process. This is because: •

although in some cases the problems of the business lie with existing management, management will often be key to the value of the business going forward; and

•

the information-gathering exercise required as a precursor to the restructuring will be far more difficult without their help.

Management are likely to prefer a restructuring to an unplanned formal insolvency for a number of reasons. In the latter case executive directors could lose their jobs and all directors who hold equity or share options would lose these. Formal insolvency may lead to disqualification proceedings against the directors, and on a liquidation personal liability is a possibility. However, management will still remain wary of the risk that, by continuing to trade, they may increase their exposure to disqualification or personal liability should the restructuring fail and formal insolvency still result. Stakeholders who are trying to resist a restructuring may well see the directors as a potential weak point, and try to put pressure on them by suggesting various ways in which the directors might be in breach of their duties. However, decisions such as that in the IMO Car Wash case should give the directors comfort here (see Section 11.6.2.2). 306

Restructuring 11.4 Non-executive directors may also have different motivations from executive directors. The group will not be their only source of income, and they are also likely to have less emotional commitment to the survival of the group. They may be more concerned that if they remain a director of a group which fails, this could adversely affect their own reputations. In addition to creating stability generally in the other ways described in this chapter, the stakeholders may therefore need to address management’s concerns: •

by addressing management’s own incentivisation packages early. This may involve restoring value to management’s existing shares or promising them fresh shares in a newly-solvent restructured group. However, where the proposed restructuring may not restore any value to the shareholders, management may instead need to be offered their incentive in the form of a participation in the debt component of the balance sheet (as an incentive to reduce that debt rapidly). This would need to be ranked at or around the point where the value breaks and therefore may need to be ranked ahead of some of the debt owed to finance creditors;

•

by creating a stable financial environment, as outlined in Section 11.4; and

•

by giving comfort to the existing directors that they are not being left to take the risk alone. In this respect, the stakeholders may be inclined anyway to supplement the existing board by appointing one or more further directors with specialist turnaround expertise.

11.4  CREATING A STABLE FINANCIAL ENVIRONMENT 11.4.1  What principles have historically applied here? There have been a number of attempts, with varying degrees of success, to form a consolidated set of principles to govern restructurings in the UK market. Perhaps most notably, the Bank of England developed a set of general principles in the 1970s to govern how a group’s finance creditors should respond when they become aware that the group is facing serious financial difficulties. These principles became known as the London Approach and, whilst never codified as binding law, have been applied (in whole or part) in a number of restructurings over the years. In 2000, INSOL  International (the International Federation of Insolvency Professionals) published the INSOL Global Principles for Multi-Creditor Workouts (the ‘INSOL Principles’). These were intended to be a statement of best practice to be followed in multi-creditor restructurings. Broadly speaking, the principles involved reflect the London Approach, but they were designed to be equally applicable in a variety of different jurisdictions.

11.4.2  What principles would apply now? Neither the London Approach nor the INSOL Principles has ever had any statutory force and are no longer applied in the way that they once were, and they are unlikely now even to be directly referred to by name. This is largely due to the fact that it has become commonplace for a group’s finance debt to be held by an increasing number of entities, often with a variety of agendas. Aggressive distressed debt investors in 307

11.4  Restructuring particular may well have very different aims from those envisaged in these principles. Increasingly, lenders are looking to take a seat at the table themselves, rather than to be represented by and receive information from a co-ordinator. Even when just trying to create stability, therefore, there is likely to be a far greater need to look at ways in which decisions can be taken without the need for the unanimous consent of all of the stakeholders. However, the general principles involved still provide a useful starting point for moving towards a restructuring which is designed to enable the survival of the group and where a majority of those stakeholders with a real economic interest in the group are inclined to co-operate to achieve this. Consequently, whilst the London Approach and the INSOL Principles are no longer formally adopted at the outset of modern restructurings, certain principles and techniques prescribed by them are often still used. These include: •

the use of ‘standstill’ arrangements which, amongst other things, prevent the company’s creditors from taking enforcement action and from transferring or sub-participating their debt during the restructuring so that the negotiating parties do not continually change;

•

the use of a committee to co-ordinate responses from creditors and the appointment of professional advisors (termed a ‘co-ordination committee’ or ‘co-com’), which is usually headed by a ‘co-ordinator’;

•

principles relating to the sharing of information between the company and creditors; and

•

principles for the provision of any ‘new’ money by the lenders.

11.4.3  The co-ordinator In restructurings where a co-ordinator is still used, they are appointed by the group’s lenders and the group itself, and will normally be the lender with the largest exposure. They will play the role of ‘lead bank’ in the restructuring. The scope of the coordinator’s role is often set out in a specific co-ordination agreement. This role is likely to include: •

collating and disseminating the financial and other information provided by the group, and by the investigating accountants (see Section 11.5);

•

providing feedback to the group on any information provided by it, and on any presentations given by the group to its lenders;

•

liaising between the group and any facility agents, or possibly the individual lenders, with regard to the any standstill arrangement and any requests for new money by the group; and

•

liaising between the group and the other lenders in relation to any restructuring proposals put forward.

Although it may be responsible for obtaining legal and financial advice, the coordinator’s own role is therefore administrative, not advisory, and it will ensure that the co-ordination agreement places clear limits on its responsibilities. A co-ordinator may nonetheless in practice provide much of the driving force needed to achieve the restructuring. 308

Restructuring 11.4 Any co-ordination agreement will also deal with the co-ordinator’s fees and other expenses. Since these are likely to be borne by the group itself, it will usually take a particular interest in the extent of the co-ordinator’s role and its ability to engage advisers. A  key issue here for the co-ordinator tends to be an indemnity from the lenders for any liability they might suffer, for example as a result of being sued by a third party, or at least an exclusion of liability from fund lenders whose constitutions do not permit them to give indemnities. It is possible that a co-ordination committee may be formed containing a number of the larger lenders and/or representatives of different lender groups. Such a committee will either play the role of co-ordinator, or form an intermediate point of liaison between the co-ordinator and the lenders generally. Often the co-ordinator will itself already have another role as agent or as security trustee under the finance documents. It will also, of course, be a lender in its own right. These other roles will carry different responsibilities, and be separate, from its role as co-ordinator. The bank concerned may need to clarify on occasions in which role it is acting, particularly when it receives information.

11.4.4  The need for advisers The group is likely to need the following advisers during a restructuring process: •

Accountancy advisers. The group’s auditors will already know the group and will play an important part in helping to provide the financial information the stakeholders will need.

•

Legal advisers. Whilst the group will already have existing legal advisers, the directors will need advice as to their responsibilities and duties as directors. If the existing legal advisers also act for a major shareholder, they and the directors will need to consider whether this creates, or may in future create, a conflict of interest requiring a different legal adviser to be retained to advise the board.

•

Financial advisers. These will generally be bankers or accountants by training, and are likely to play a lead role in liaising with the other stakeholders and developing the restructuring proposal. A financial adviser will often also have worked in the past with many of the key individuals within the lenders’ and advisers’ organisations on similar restructurings. Their appointment should therefore assist in making these stakeholders feel more comfortable, and in making initial discussions more productive.

•

Debt advisers. Where the group may be seeking to refinance existing debt as one of its options, it may well also benefit from engaging a debt adviser if it does not have one already who can guide it as to the options available. The possible sources of debt are becoming increasingly wide.

•

PR advisers. Public relations issues will grow increasingly important in maintaining stability, as rumours will almost inevitably spread in the outside world that the group is in difficulty. (These rumours may indeed sometimes originate from minority stakeholders who have their own agendas to pursue.)

The group is likely to be actively encouraged by its various stakeholders to ensure it has the right advisers in place at an early stage in the process. The stakeholders 309

11.4  Restructuring will also wish to appoint other advisers. These may include legal advisers to the coordinator, and investigating accountants and valuers (see Section 11.5). The facility agreement may already provide that the cost of some of these advisers is to be borne by the group itself. Even where it does not, the lenders may consider that they are in a position to negotiate a requirement to this effect. It is common for a group initially to resist appointing additional advisers itself, and particularly to question the need for the lenders to appoint further advisers, given the cost involved. The lenders will see this differently. If there is currently doubt as to whether they will be paid in full, they will consider that the group is spending their money, rather than its own or its shareholders’ money on the costs of the advice.

11.4.5  Standstill agreement 11.4.5.1  Is a standstill agreement necessary? Even if a group of lenders who would be entitled to enforce have already concluded that it is not presently in their interests to do so, both the group and individual stakeholders may press for a formal agreement. A  standstill agreement not only governs the company’s relationship with its lenders, but also those lenders’ relationships with each other. The standstill gives a feeling of stability both internally and externally. Indeed, the group may specially need to be able to show an external regulator such as the FCA (or indeed TPR) that a standstill is in place.

11.4.5.2  What are the typical terms of a standstill agreement? The standstill will typically contain provisions dealing with the following: •

suspension of the lenders’ rights to accelerate facilities or enforce guarantees or security, notwithstanding a stipulated list of events of default which have occurred (or may occur);

•

agreement by the lenders to allow the group to continue to use its existing facilities, notwithstanding a stipulated list of defaults;

•

agreement by the lenders not to improve their positions vis-à-vis each other, for example, by setting off cash balances;

•

agreement by the lenders to share any losses in an agreed manner. Such provisions may be needed if, for example, some lenders are continuing to make revolving or ancillary facilities available to the group. They are likely to provide for balancing payments at the end of the standstill by better-off lender to worse-off lenders;

•

agreement by the lenders not to trade their debt. The restructuring may be set back if new stakeholders with different agendas became involved part-way through (although this may be negotiated so that lenders are only prohibited from selling their debt to certain types of purchaser or to specific purchasers named on a list);

•

agreement by the group to provide more detailed and/or more frequent financial information (which will be relevant to the information-gathering process discussed in Section 11.5); 310

Restructuring 11.4 •

agreement by the group not to take various actions which might affect the prospective returns to lenders. For example, tighter controls may be imposed on the group’s ability to make disposals or to pay out any money to lowerranking stakeholders in the ordinary course. If cash flow permits, the lenders might also seek to reduce their exposure by requiring surplus cash to be used to pay down their existing facilities or placed in a blocked account for lenders to decide whether to release back if needed for cash flow or apply in prepayment; and

•

terms permitting any new funding to be on a super-priority basis. If this cannot be dealt with by amendment to the existing inter-creditor agreement due to the resistance of other stakeholders, it may need to be dealt with by a more limited priority agreement.

Commonly the standstill will terminate at the end of a specified period, or on earlier notice (the period of which needs to be agreed) if a stipulated majority of the creditors so require, although if the company needs the standstill to give comfort to some third party this may not be appropriate. It is likely also to terminate if an event of default other than one of those on the stipulated list occurs. It is also common for lenders to agree to be ‘locked-up’, either in the standstill agreement or in a separate lock-up agreement, in which they agree to vote in favour of any amendments or waivers required to implement the proposed restructuring. This will usually include an agreement to vote in favour of any CVA, Scheme of Arrangement or Restructuring Plan which is proposed to effect the restructuring. Certain caveats will, however, often be negotiated by lenders (for example, that the lock-up terminates if there is a material change in the company’s financial condition before the restructuring is completed) in order to retain a degree of flexibility if the company deviates from the restructuring or there is a change in the company’s circumstances.

11.4.5.3  Who needs to be a party? The group will wish any group of lenders who would immediately be entitled to enforce to be parties to the standstill agreement. Mezzanine and similarly subordinated lenders are likely to be prevented from taking immediate enforcement action for stipulated periods of time by standstill provisions in an existing inter-creditor agreement. They will nonetheless often still sign up to the formal standstill arrangements, and may need to do so, for example, if there would otherwise be a ‘notifiable event’ (see Section 11.8). They will wish to be clear as to whether the standstill under the standstill agreement runs concurrently or consecutively with those in the inter-creditor agreement. Other finance creditors, such as bondholders, will usually not have the ability to enforce unless there is a payment or insolvency default. They will typically not therefore join as a party to the standstill agreement.

11.4.6  Cash-flow issues For any restructuring to succeed, the group must continue to have enough working capital to satisfy its day-to-day needs. Clearly these needs are likely to increase as a result of the costs of the restructuring itself. 311

11.4  Restructuring

11.4.6.1  Drawdown on existing facilities Tactically, a group which has not yet breached the financial covenants under its credit facilities but which anticipates a breach, may try to place itself in a stronger position by drawing down any unused part of its working capital facilities immediately to stockpile cash. It is possible that an agent or lender may still try to oppose this, if it considers that some other breach has already occurred. Possible additional events of default which will apply here are: •

Material adverse change (‘MAC’). Whether this is applicable may depend on the exact wording of the clause, particularly the degree of discretion given to the agent or lender as to what constitutes a MAC.

•

Insolvency. However, it is likely to be insufficient that the group is balance sheet or even cash-flow insolvent on paper, so long as it has not been deemed unable to pay its debts (see Chapter 1).

•

Insolvency proceedings. If the group has already approached the lenders to discuss a restructuring at this stage, it may be in breach here through having taken a step in relation to a compromise or arrangement with its creditors.

Otherwise, the group’s ability to continue to drawdown on facilities will be a negotiating point in any standstill agreement.

11.4.6.2  New money In England, there is no legislative framework to provide for new money to be injected into a group which is being restructured. If new money is needed, the various stakeholders therefore need to reach agreement in each case as to who will provide any new money and where it will sit within an existing security structure. This contrasts with other jurisdictions such as the USA where the bankruptcy legislation specifically deals with this. The senior lenders, or some of them, have historically been the natural source of new money required by the group to tide it over during the restructuring. However, new money may often also come from other lenders whose existing debts are lower ranking, or possibly from shareholders. Outside investors who have no existing interest in a group may also be willing to provide new money. Regardless of the status of any existing money owed to the new money provider, however, any new money would normally be given priority status (despite this, the return on any new money is often set at a higher level than that on the highest ranking of the existing facilities). A  new money request can prove a contentious issue. Whilst they recognise that the aim is to buy further time to find a solution which will protect their existing investment, lenders will still wish to assess at the point of the request how likely it is that both the new money and their existing exposures are to be repaid. Stakeholders will generally ask the company to consider other cash-flow management techniques to reduce the new money needs (see Section 11.4.6.3). The group needs to assess the amount of new money it requests carefully. Lenders are unlikely to look favourably on a group which makes repeated requests for new money because its first request was for too low an amount. The lenders will start to lose faith in the systems used by the group in analysing its requirements, and may question the viability of any restructuring proposal put together using the same systems. 312

Restructuring 11.4

11.4.6.3  Cash-flow management In addition to, or instead of, asking for new money the group may also ask existing lenders temporarily to postpone payments of principal and/or interest under a banking facility. Again, lenders will generally ask the company to consider other cash-flow management techniques before, or as a condition of, acceding to such a request. Table 11.2 lists some of the cash-flow management techniques commonly used. Whether any of these techniques are likely to be practicable – and if so which – will depend on the time which is likely to elapse before the restructuring is finalised. Table 11.2 – Methods employed in managing cash (in addition to speaking to existing/ new lenders) Action

Relevant considerations

Identify and dispose of surplus premises or business assets.

Secured lenders will regards these assets as part of their security, and may wish to see these payments used to reduce overall debt instead.

Ensure that older/surplus stock is realised, and/ It may be desirable to sell older/surplus stock or that unbilled work-in-progress is invoiced, at a significant discount if cash needs are promptly. paramount. Recover outstanding debts efficiently, for example: • improve collection procedures for ‘good’ debts; and • reach compromises with debtors who are disputing their liability to pay.

Where the company has an invoicediscounting facility, however, there may be limited scope for it to benefit from these steps. It may be desirable to compromise disputes over large sums swiftly, even if this is on worse terms than the company could obtain given more time.

Reduce surplus expenditure, for example: • put a hold on any non-essential capital expenditure; • reduce employment costs, eg by limiting discretionary bonuses and other nonessential benefits, stopping planned salary increases or promotions, and reducing overstaffing; • reduce costs by renegotiating with suppliers or changing supplier; • eliminate surplus overheads such as subscriptions, entertainment, advertising, training, travel, etc. Ensure that strict internal controls are placed on purchasing generally.

Obtain employment law advice before reducing over-staffing costs since, if handled badly, this approach could lead to additional employee claims against the company. Consider also the effect on workforce morale. A redundancy programme will still result in a significant one-off upfront cost. Reducing overheads will need to be part of a strategy – a prolonged decrease in some capital or other expenditure will eventually damage the business.

Extend creditor payment dates (and/or reduce sums due), for example: • agree with HMRC to defer tax payments by paying in instalments; • agree with landlords to pay rent monthly rather than quarterly or to reduce the rent temporarily; or • agree with suppliers to extend payment dates.

It is better to reach agreements with creditors rather than just withhold payment. Directors who delay payments to HMRC in particular risk the company receiving a winding up petition or disqualification. It is also important not to misrepresent or withhold information in reaching agreements with creditors. HMRC have a dedicated Payments Support Service to deal with such requests. They are supportive, where appropriate, but must be convinced that the company will meet rescheduled payments.

313

11.5  Restructuring

11.5  INFORMATION GATHERING 11.5.1  What information is needed? From a financial perspective, there are three main elements to the informationgathering process: • The business plan. This will indicate the level of debt which the group can continue to service going forward and enable finance creditors to understand the projected return on any equity instruments that they may receive in connection with the restructuring. • Financial due diligence. Further investigation into the group’s financial affairs will enable the business plan to be tested and, if necessary, amended. •

Valuations. These will indicate the total amount likely to be achieved on a sale of the group’s business (or, if relevant, its assets).

The information revealed will determine the strength of the respective stakeholders’ positions in the course of any further restructuring negotiations. Conversely, it may lead stakeholders to conclude that a restructuring would not be achievable.

11.5.2  Independent reporting accountants The group itself will normally provide regular information to its lenders. However, the lenders, particularly bank lenders, often wish to engage independent reporting accountants of their own. The role of the reporting accountants may include the following: •

to review and verify the cash flow projections and other financial information provided by the group;

•

to assess the adequacy of the business plan and systems used by management;

•

to assess the performance of the group by comparison within other companies operating with a similar industry sector;

•

to review the restructuring proposals put forward by the group; and

•

to identify and review any alternatives which exist, including formal insolvency, and calculate the likely returns to the senior lenders in such scenarios. Sometimes this will include a fuller contingency planning exercise to prepare for the eventuality that one of these alternatives does ultimately occur.

The identity and scope of work of the independent reporting accountants often proves contentious. This will be partly on the costs grounds already identified in Section 11.4.3. Management may feel they are in practice assessing the adequacy of the management team themselves. Sometimes management are also nervous that the independent reporting accountants might be inclined to recommend formal insolvency if this could lead to a greater fee income for their own firm, and if so this concern needs to be identified and addressed. As groups gain experience of restructuring – and many groups will now have been through some form of restructuring process already in recent years – they may be inclined to appoint accounting advisers themselves at an early stage. Usually, however, lenders will nonetheless continue to engage additional advisers to provide the lenders with their own analysis and support. 314

Restructuring 11.6

11.6  LOOKING AT THE RESTRUCTURING OPTIONS AND IMPLEMENTING A SOLUTION 11.6.1  What are the possible consensual options? There are a number of possible consensual options, ie options which will require the consent of all affected stakeholders. Examples of these include the following.

11.6.1.1  Amendment and restatement This will involve a change in the terms of the lending facilities and/or bonds. It may involve, for example a rescheduling of payments of principal or interest to give the group longer to pay and/or an increase in the facility limits (or an adaptation of the facilities to incorporate some additional source of finance such as an asset-based facility using the group’s receivables). The lenders concerned will, however, wish to see their positions improved in some other way in return for their agreement. Possibilities include: •

a further injection of equity or subordinated shareholder loans;

•

tighter financial and/or operational covenants;

•

more onerous continuing financial information obligations;

•

a higher interest rate;

•

guarantees from additional subsidiaries and/or new security (although s 245 IA 1986 and possibly s 239 IA 1986 will be a factor here if the group is receiving no new monies – see Chapter 5);

•

an asset disposal programme and/or a cash sweep mechanism, where proceeds or other surplus monies are used to pay down the debt;

•

greater freedom to trade their debt, for example, by removing any group consent rights; and/or

• increased fees.

11.6.1.2 Refinancing This will involve the advance of fresh monies to repay existing debt. A refinancing will typically involve an incoming lender or group of lenders fully or partially replacing the existing lenders. It has become increasingly common in recent years for existing debt to be refinanced by the issue of bonds. Provided the refinancier is satisfied that sufficient security is available, for example because it evaluates the assets of the group in a different way from the existing lenders, it may be possible for the group to increase its overall facilities on a refinancing. However, the terms of the refinanced debt may well be less favourable to the group. The possibilities set out in Section 11.6.1.1 will also be relevant here.

11.6.1.3  Reduction of debt An outright release of debt is generally an unattractive restructuring tool from a tax perspective, as the debt released can be credited to the debtor as an income receipt 315

11.6  Restructuring with the result that charge to tax could arise (in the absence of any losses or other reliefs to shelter the charge). However, there are certain circumstances where a tax charge will not arise. For example (subject to conditions and exceptions in certain cases): •

Where the debt is released in consideration of the issue of ordinary shares in the debtor. ‘Ordinary shares’ must include a right to receive distributions but may include preference shares provided they do not carry a right to dividends at a fixed rate. This can make a debt to equity swap an attractive option for reducing debt, and this is discussed further in Section 11.7.

•

Where the debt is released as part of a statutory insolvency arrangement. Such an arrangement may include a CVA, Scheme of Arrangement or Restructuring Plan.

•

Where the debtor meets one of a number of ‘insolvency conditions’. The insolvency conditions include situations where the debtor is in insolvent liquidation, administration or administrative receivership, where a provisional liquidator has been appointed in relation to the debtor under s 135 IA 1986 or where the debtor is in an equivalent situation outside the UK.

•

Where the ‘Corporate Rescue Exemption’ applies. This can apply where, immediately before the release of the debt in question, it is reasonable to assume that, without the release and any arrangements of which the release forms part, there would be a material risk that at some time within the next 12 months the company would be unable to pay its debts. For these purposes the company is ‘unable to pay its debts’ if (a) it is unable to pay its debts as they fall due, or (b) the value of its assets is less than the amount of its liabilities, taking into account contingent and prospective liabilities. The meaning of this test in the IA 1986 context is discussed further in Chapter 1. The ‘material risk’ threshold is significantly lower than the ‘no reasonable prospect’ threshold applicable to wrongful trading, so relying on this exemption should not of itself mean that directors have placed themselves at risk of personal liability by continuing to trade.

•

Where the debtor and creditor are ‘connected’. This requires that one has control of the other or that both are under common control at some point during the accounting period in question. This seems comparatively unlikely so far as most lenders are concerned unless they have taken shares in an earlier restructuring.

11.6.2  What is the alternative? The stakeholders are unlikely to agree upon a consensual solution unless each of the stakeholders involved perceives that it would be placed in a worse position under any likely alternative. The group, and any stakeholders who actively wish to pursue the restructuring are therefore likely to need to convince the remaining stakeholders that a less attractive alternative exists and will be implemented should all stakeholders not achieve a consensual restructuring.

11.6.2.1  Alternatives to a restructuring Possible alternative scenarios are: 316

Restructuring 11.6 • An ‘unplanned’ formal insolvency. This is a formal insolvency process into which the group is effectively forced because a trigger point occurs, and either a creditor takes enforcement action or the boards of directors of the various group companies conclude the group has no reasonable prospect of avoiding insolvent liquidation and initiate the process themselves. The term ‘unplanned’ here is used to distinguish such a process from a ‘planned’ formal insolvency used as a restructuring tool (see below). Crucially, an unplanned process may well involve the formal insolvency of operating subsidiaries as well as holding companies within the group, and will almost certainly have a negative impact on realisations. • A solvent sale of the business or assets. This is likely to generate a higher price than a sale out of formal insolvency. However, it is still likely to be perceived by potential buyers as a forced sale to some extent, which will adversely affect the level of any offers. The directors may also find it unattractive because it exposes them rather than an insolvency officeholder to any claims that the sale was at an undervalue, although if the group has exposed the business and assets properly to the market prior to any sales the risks should not be great. •

Maintaining the status quo. So long as an interim solution can be found every time a trigger point occurs, then there will be no need to carry out any wider restructuring. In many cases, interim solutions are found and the only real driver for a restructuring is ultimately that the group is about to run out of cash. However, maintaining the status quo will be unattractive to finance creditors who have bought debt at a discount with a view to making a return. Where interest payments to mezzanine or other subordinated lenders or dividend payments to shareholders are blocked as a result of a default, they may also wish to see a speedier resolution. It is also likely to be unattractive to management, who will want the group’s difficulties resolved so that they can focus once again on running and growing the business; they may also want to ensure that any shares they hold retain value or are replaced with an incentive package which gives them an equivalent return.

11.6.2.2  Non-consensual restructuring Section 11.3.2.4 has already looked at when the majority voting provisions of documents may be used to make changes to finance creditors’ rights. However, whilst these provisions may often be used to achieve a temporary fix, it will generally not be possible to use this route alone to achieve a fuller restructuring where not all stakeholders are prepared to agree terms. Various of the formal processes described in this book may then be needed as mechanisms for achieving such a ‘non-consensual restructuring’. They may be required because stakeholders are actively opposed to the restructuring. However, they may also be useful tools to circumvent stakeholders who for their own internal reasons are unable to support the restructuring voluntarily, eg  a credit fund lender whose investment period has expired. They may also be needed to circumvent stakeholders who now see their interest in the group as valueless and therefore choose not to engage at all. For example: • A pre-packaged administration or receivership can be used to circumvent the claims of dissenting shareholders or lower-ranking creditors by transferring assets to a new company buyer whose debt and equity structure reflect the desired outcome. Pre-packs have already been discussed generally in Chapter 4, but the use of a pre-pack as a restructuring tool is discussed further in Section 11.7. 317

11.6  Restructuring • A Scheme of Arrangement or Restructuring Plan can be used to bind, or ‘cram-down’, a minority of dissenting creditors and/or shareholders within a class, and in the latter case to cram-down one or more entire dissenting classes. The use of Schemes and Plans was discussed generally in Chapter 8. • A CVA can similarly be used to cram down a minority of dissenting unsecured creditors. Unlike a Scheme of Arrangement, there is no need to divide creditors into separate classes. However, its usefulness is limited by the fact that it can neither bind a secured creditor (without their consent), nor affect a shareholder’s rights. The use of CVAs was discussed generally in Chapter 8. A  summary of the advantages and disadvantages of these respective processes as restructuring tools is set out in Table 11.3. Normally the costs and other disadvantages will be such that a consensual restructuring is more attractive if it can be achieved. Clearly these non-consensual routes also still require a sufficient number of the stakeholders affected to support the process – they can only be used to overcome the resistance of minority stakeholders or stakeholders who would otherwise expect to receive nothing on a formal insolvency, or to by-pass stakeholders who cannot or do not engage at all. Table 11.3 – Non-consensual restructuring processes Advantages

Disadvantages

Pre-packaged administration

• Can circumvent creditors and shareholders who would receive nothing on a formal insolvency • A share transfer at holding company level avoids any disruption at an operating company level. Process can be completed before it becomes public • Relatively quick and certain outcome, driven by creditors that have a real economic interest in the group • It is the administrator who bears the risk of challenge by any disenfranchised creditors

• The additional fees of the administrator, the valuers and the administrator’s other advisers can be substantial • Valuations are critical, and the most time-consuming step. The administrator might also require a marketing exercise • If guarantees and security cannot be released on a share sale, may also need an administration of operating subsidiaries, which is considerably more disruptive • Disenfranchised stakeholders recognise that pre-packaged administrations carry a degree of stigma, so may fight a retrospective PR campaign

Restructuring Plan

• Binds all stakeholders in those classes which approve the Plan, apathetic as well as recalcitrant minority stakeholders • Can be used to circumvent dissenting classes of creditors and shareholders who would receive nothing under the ‘relevant alternative’ • Can be used to ‘cross-class cramdown’ dissenting classes of creditors and shareholders who would be no worse off under the Plan than under the relevant alternative • Flexible enough to restructure shareholdings as well as debt • Can bind secured as well as unsecured creditors

• Multiple classes are likely to be involved and determining their composition can be complicated • Save where a class has no genuine economic interest, or where crossclass cram-down applies, requires support of 75% in value of each class affected • Court hearings and meetings make this a more public process • Court hearings and meetings take time and lead to less certainty of outcome until the final court hearing has occurred

318

Restructuring 11.6 Restructuring Plan – contd

• Potentially available to a non-UK company, even where its COMI is not in the UK • Outcome is certain once the final hearing has occurred

CVA

• Can bind all unsecured creditors – no need to divide into separate classes • Likely to be cheaper than either a Restructuring Plan or a pre-pack • Onus is on creditors who have been unfairly prejudiced to bring a challenge

• Cannot be used to bind secured (or preferential) creditors without their consent • Cannot be used to bind shareholders without their consent • The meeting of shareholders and the need to send notice to all creditors make this a public process

The case of Re Bluebrook, often referred to as the IMO Car Wash case, is a good illustration of a restructuring where a Scheme, a pre-packaged administration and the power of release contained within the inter-creditor agreement were all required in order to achieve the desired result. Despite the fact that this restructuring occurred before Restructuring Plans were available as a restructuring tool, the considerations in the case remain generally relevant. Fuller details of this case are set out in the box below.

Re Bluebrook [2009] EWHC 2114 (Ch) (the ‘IMO Car Wash’ case) The IMO group, which operated the largest car wash business in the world, owed its senior lenders £313 million and its mezzanine lenders £119 million, secured by a comprehensive guarantee and security package across the group. An intercreditor agreement expressly subordinated the mezzanine debt to the senior debt. It also gave the security agent the authority to release security and liabilities upon an enforcement action provided that the proceeds were applied in accordance with the inter-creditor agreement. A  new structure was set up whereby £185 million of senior debt would be novated to a new holding company, £12 million would remain behind and the remainder would be exchanged for shares in a new holding company. All of the mezzanine debt would remain behind. Schemes were required for Bluebrook and two other holding companies because a small minority of senior lenders would not consent voluntarily to this proposed restructuring. However, the Schemes themselves did not transfer any assets. Following sanction, various holding companies would be placed into administration, and the administrator would transfer their assets to the new holding companies. The security and guarantees held by the mezzanine lenders would then be released pursuant to the inter-creditor agreement. The Scheme did not affect the mezzanine lenders’ legal rights and they were given no opportunity to vote. However, they could still object at the sanction hearing on the grounds of fairness, and raised two main arguments: •

Valuation. If there was a realistic possibility that the scheme companies’ values exceeded the senior debt, it would be unfair to the mezzanine lenders if the Schemes allowed all of their assets to be stripped out for the benefit of the senior lenders. 319

11.7  Restructuring •

Directors’ duties. The directors of the scheme companies had only taken account of the interests of the senior lenders, so had failed properly to exploit companies’ negotiating positions in breach of their duties to the creditors as a whole.

The senior lenders relied upon a number of valuations. PricewaterhouseCoopers LLP had looked at: (a) the cashflow the group’s business could be expected to generate; (b) comparable publicly traded companies and other transactions; and (c) the debt capacity of the group’s business. Rothschilds had investigated whether a purchaser could be found. Finally, King Sturge LLP had valued a number of the group companies plus their sites. The mezzanine lenders relied upon a valuation using a ‘Monte Carlo simulation’. This was cashflow-based but involved repeated calculations, using random sampling of input assumptions then aggregating them to produce a distribution of probabilities. The judge viewed the mezzanine lenders’ valuation as essentially theoretical in its approach. He preferred the senior lenders’ valuations, which he felt gave a better indication of what a real purchaser would pay for the group at that point in time. Whilst it may be possible to show unfairness if there was evidence that value would increase when economic conditions improved, there was insufficient evidence of this here. He also noted that the inter-creditor agreement gave the mezzanine lenders the right, if they were dissatisfied with certain enforcement actions, to purchase the outstanding senior debt at par. The judge also found no breach of directors’ duties. On the basis of the senior lenders’ valuations, there was no evidence that the mezzanine lenders had any economic interest. Furthermore, the mezzanine lenders were undertaking direct negotiations with the senior lenders, and had not requested that the board negotiate on their behalf.

11.6.3  The restructuring agreement In a complex restructuring it is common to use a restructuring agreement signed by the key stakeholders to create a framework for the entire restructuring. This will typically stipulate when the various other documentation required to implement the restructuring becomes effective, and may itself implement various of the steps once other conditions precedent have been satisfied.

11.7  PARTICULAR TYPES OF RESTRUCTURING 11.7.1  The debt to equity swap A debt to equity swap will involve shares being issued to creditors in return for the release of all or part of their debt. The main issues are likely to be: •

The amount of debt which should be converted. This will depend significantly on the amount of debt which the group will be able to continue to service going forward. The lender in whose tranche of debt the value breaks would normally expect to receive the largest share of any equity. Clearly, however, this lender is unlikely to agree to convert its own debt into equity unless most or all of the debt which ranks behind it is also converted. 320

Restructuring 11.7 • •

Into what the debt will be converted. As an alternative to shares, the lenders may be issued warrants or granted share options. The class of shares into which the debt should be converted. The lenders may be content to take non-voting preference shares which give them priority rights to a dividend. It is possible to provide for returns to the shareholders to increase as the group’s fortunes improve. However, the shareholders are still likely to want the shares to carry certain blocking rights and other rights such as the right to appoint a board observer or director. The terms of any non-voting shares may also provide for their conversion to voting shares in the event that the group fails to perform as projected. In addition, lenders who have acquired distressed debt as part of a wider strategy may specifically be seeking voting shares.

•

Which stakeholders should control the group following the debt to equity swap and how the equity is allocated between lenders which hold debt sitting in different tranches. The original controlling shareholders will wish to retain control if they still see long-term value in the group, but if the lenders are interested in taking voting shares, they are likely to resist this unless the shareholders are prepared to invest more capital of their own into the group. Table 11.4 shows the debt to equity swap which might emerge where a group originally has £110m of bank debt, but the business plan has shown that the group can only continue to support £60m of bank debt. At its simplest, the debt converted will be owed by the company which is to issue the shares. In the example shown in Table 11.4, the debt is initially owed by Holdco 2. If Holdco 1 has given a guarantee, it may be possible for Holdco 1 to become the debtor by the relevant lenders calling on the guarantee. Alternatively, the debt could to be novated to Holdco 1. In practice, tax considerations may result in a more complicated swap. Schemes of Arrangement and Restructuring Plans have also proved useful means of exchanging debt in one company for shares in another, although will almost certainly be more costly than a consensual debt for equity swap.

11.7.2  Pre-packaged administration or receivership 11.7.2.1  Pre-packaged sale of shares Where the only stakeholder to be affected by the restructuring are shareholders and finance creditors of a holding company, as in the structure illustrated in Table 11.1, it is possible to achieve the restructuring by appointing an administrator or receiver to sell the shares in, rather than the assets of, the operating subsidiaries. This avoids the disadvantages described in Section 11.7.2.3. Indeed, the trade and other creditors of the operating subsidiaries need not be affected at all. Table 11.5 shows how a pre-pack could be used to reduce a group’s debt burden in a similar manner to that achieved by the debt to equity swap illustrated in Table 11.4, where a consensus has not been reached with the lower-ranking stakeholders. Administration is the process used in this example. This route was used to complete the restructuring in the IMO Car Wash case discussed in Section 11.6.2. Holdco 2 is placed into administration, and the administrator sells the shares of Target and its operational subsidiaries to a new company, ‘Newco’. By way of consideration, Newco takes on the obligations to pay the senior debt in place of Holdco 2. The mezzanine lenders and any lower-ranking creditors of Holdco 1 or Holdco 2 are left 321

11.7  Restructuring as creditors of assetless companies. Provided the amount of debt assumed by Newco comfortably exceeds the value of Target it will be difficult for this arrangement to be challenged – had a third party buyer paid Holdco 2 a cash sum equal to the value of the shares, this would have been paid to the senior lenders in any event as the holder of the first-ranking fixed charge over the shares. The excess part of the debt assumed by Newco will then be converted into shares held by the senior lenders. Table 11.4 – Debt to equity swap

322

Table 11.5 – Pre-packaged administration sale

Restructuring 11.7

323

11.7  Restructuring If the mezzanine lenders hold security over the shares of Target, and guarantees and security from Target and its operating subsidiaries, however, the pre-pack can only be implemented if there is a way of releasing these on the sale. As seen in Chapter 4, an administrator is able to sell assets free of any floating charge security, but not of fixed charge security without a court order. Moreover, they will have no statutory power to release the guarantees and security given by Target and its subsidiaries. Nowadays, a well-drafted inter-creditor agreement will often give the senior security holder or any administrator or receiver they appoint, the power to grant all of the necessary releases of security. It needs to allow the release of any debt owed (either as a principal borrower or as a guarantor) by any companies whose shares are being sold provided the proceeds of sale are applied in accordance with the inter-creditor agreement. This was the case in the IMO Car Wash case, for example. However, the inter-creditor agreement will need to be checked in each case, as older agreements may provide less assistance and drafting ambiguities may still exist. An example of this occurred in HHY Luxembourg Sarl v Barclays Bank Plc [2010] EWCA Civ 1248 (the ‘European Directories case’) where a literal reading of the document suggested that it did not allow some liabilities to the mezzanine lender to be released, although the Court of Appeal were eventually persuaded that the agreement should be read purposively. In Re Christophorus 3 Ltd [2014] EWHC 1162 (Ch), the administrators sought an appointment by court order prior to carrying out the pre-pack sale in order to satisfy a requirement under the release provisions that the sale be implemented by a ‘courtapproved process’. The court was also prepared to rule at the same hearing that the security trustee was then entitled to release security over shares being sold and to release the companies being sold from various of their liabilities.

11.7.2.2  Other considerations on a share sale In practice, a pre-pack is still likely to require more than just a share sale, as the holding companies are likely to hold other assets and to perform groupwide functions. For example: •

target and/or the operating companies may well owe intragroup debts to the holding companies. Unless the benefit of these debts is sold to Newco, or they are otherwise dealt with, they would remain assets of the holding companies which the administrator, or any subsequent liquidator of these holding companies would have to seek to recover from the debtor concerned. For this reason, an analysis, and possibly a rationalisation, of the group’s internal debts is always an important part of the planning process;

•

the holding companies may have given guarantees in respect of the operating companies’ liabilities, for example to landlords of the operating companies’ trading premises;

•

groupwide insurance policies, for example directors’ and officers’ (or ‘D&O’) insurance, are often in the name of the holding companies; and

•

whilst most group employees are likely to be employed by the operating subsidiaries, the senior employees will most likely be employed by the holding companies. 324

Restructuring 11.8 In addition, it will be necessary, for example, to review the group’s key contacts to see whether a change of control of the group and/or the formal insolvency of one or more of the holding companies will allow the other party to the contract to terminate it.

11.7.2.3  Pre-packaged sale of a business It may be necessary to place one of more of the operating subsidiaries into administration, and for the administrator to sell their businesses to Newco if: •

the inter-creditor agreement fails to give the administrator the ability to release the guarantees or security given by the operating subsidiaries on a share sale; or

•

the aim is to restructure some of the debts of the operating subsidiaries themselves, for example, their obligation to their landlords.

However, this route is less attractive than a share sale for a number of reasons: •

A  prepack involving the formal insolvency of an operating subsidiary will require a more extensive public relations exercise, and this may be particularly difficult where the companies concerned operate in the financial, or another regulated, sector.

•

The business sale will require various third parties, such as lessors, landlords and the counterparties to those companies’ other contracts to agree to the transfer of those subsidiaries’ rights and obligations to the buyer.

•

The directors of the operating subsidiaries may regard a pre-pack of a trading company as less appealing, since they will need to be more conscious of protecting creditors’ positions in the period prior to the formal insolvency.

11.8  PENSIONS ISSUES 11.8.1  Why are pensions a particular issue? The position of a pension scheme on a formal insolvency was discussed in Chapter 10. TPR is likely to play a role in any restructuring where there is a defined benefit pension scheme which has a deficit when calculated on the full buy-out basis. The aims of TPR include protecting the benefits of pension scheme members and reducing the risk of situations arising that may lead to compensation being payable from the Pension Protection Fund (‘PPF’). To help TPR achieve its aims, it has been given the power to make third parties liable for the pensions deficit in certain circumstances through financial support directions (‘FSDs’) and contribution notices. These are intended to prevent stakeholders abusing the PPF by structuring a group, or carrying out a transaction, in a way which leaves the pensions liability with an underfunded company whilst funds exist elsewhere. They are therefore often referred to as the ‘moral hazard’ provisions and are described further in Section 11.8.2. Employers and trustees are also required to inform TPR of any ‘notifiable event’ in relation to a pension scheme or the company which is the employer (s 69 Pensions 325

11.8  Restructuring Act 2004). This is designed to give TPR advance warning of difficulties which exist to allow it to assist or intervene before a claim for compensation from the PPF becomes necessary. Table 11.6 sets out those events which are notifiable if they occur in relation to the employer (as per the Pensions Regulator (Notifiable Events) Regulations 2005). Table 11.6 – Notifiable events in relation to an employer (a)

any decision by the employer to take action which will, or is intended to, result in a debt which is or may become due to the scheme not being paid in full;

(b)

a decision by the employer to cease to carry on business in the UK;

(c)

receipt by the employer of advice that it is trading wrongfully within the meaning of s 214 IA 1986, or circumstances being reached in which a director or former director of the company knows that there is no reasonable prospect that the company will avoid going into insolvent liquidation;

(d)

any breach by the employer of a covenant in an agreement between the employer and a bank or other institution providing banking services, other than where the bank or other institution agrees with the employer not to enforce the covenant;

(e)

where the employer is a company, a decision by a controlling company to relinquish control of the employer company;

(f)

the conviction of an individual for an offence involving dishonesty if the offence was committed while the individual was a director or partner of the employer.

11.8.2  The moral hazard provisions 11.8.2.1  What is a financial support direction? Under s  43 Pensions Act 2004, TPR may, if it considers it reasonable to do so, direct a person who is associated with or connected to an ‘employer’ to put financial support in place to meet the employer’s pension liabilities. This can apply where the employer is, or was in the 24-month period prior to TPR first issuing a ‘warning notice’ that it proposed to issue a financial support direction (or ‘FSD’): • a service company (ie  its turnover is solely or principally derived from amounts charged for providing employees to other members of the group); or •

insufficiently resourced (ie the value of its resources is less than 50% of the estimated scheme deficit, calculated on the full buy-out basis and other members of the group have together sufficient resources to make up the shortfall).

The terms ‘associated’ or ‘connected’ bear the meaning given to them by IA 1986, as discussed in Chapter 5. References to ‘group’ here are references to entities that are associated or connected with the employer.

11.8.2.2  What is a contribution notice? Under s  38 Pensions Act 2004, TPR may also, if it considers it reasonable to do so, require an associated or connected person to contribute all or part of the pension scheme deficit. 326

Restructuring 11.8 This can apply if the person in question was a party to an act or deliberate failure to act: •

which (in TPR’s opinion) was materially detrimental to the likelihood of members’ benefits being paid, regardless of whether or not this was its intended purpose (although a statutory defence will be available if the party can show that they gave reasonable consideration to any potential detrimental impact and acted appropriately before the detrimental act or failure to act) (the ‘material detrimental test’); or

•

if, immediately before an act or failure to act the scheme had a deficit as determined by TPR and the act or failure to act reduced the amount that may be recovered by the scheme if a hypothetical section 75 debt had arisen at the time (the ‘employer insolvency test’); or.

•

if, immediately before the act or failure to act the scheme had a deficit as determined by TPR, and the act or failure to act reduced the resources of the employer and such reduction was material relative to a hypothetical section 75 debt arising at the time (the ‘employer resources test’); or

•

one of the main purposes of which was (in TPR’s opinion) to prevent the recovery of all or part of the deficit or to prevent such a debt becoming due, to compromise or otherwise settle such a debt, or to reduce the amount of a debt which would otherwise have become due.

TPR has issued a Code of Practice, in force from November 2021, setting out the circumstances in which it would consider issuing a contribution notice under the material detriment test, the employer insolvency test and the employer resources test. That Code of Practice is accompanied by separate examples which illustrate how these three tests for contribution notices might be applied by TPR. Of the examples provided one specifically draws on an insolvency scenario. TPR indicates it is more likely to consider any of the three tests satisfied where: ‘There is a manufactured insolvency and the employer covenant (the employer’s financial ability to support the scheme and legal obligation to do so) is removed. The management of an otherwise viable and solvent company took steps to manufacture its unnecessary insolvency to buy the business out of administration, leaving the pension scheme behind. While the scheme received an insolvency dividend, the insolvency should not have occurred at the time.’ TPR is entitled to look back at acts or failures which occurred at any time in the six-year period prior to TPR issuing the warning notice that it proposed to issue a contribution notice. As well as looking at individual acts or failures, it is entitled to look at the cumulative effect of a series of acts or failures provided that each of these occurred during this period. However, so far as the employer insolvency test and the employer resources test are concerned, it will not be able to look back prior to 1 October 2021, the date on which those two tests were introduced. TPR’s power to issue a contribution notice will apply even where the pension liabilities have been transferred to another pension scheme and the persons to be made liable are associated or connected only with the employers sponsoring the original scheme and not the new scheme. Finally, contribution notices may also be issued where a person has failed to comply with a financial support direction (s 47 Pensions Act 2004). In Re Storm Funding 327

11.8  Restructuring Limited (in administration) [2013] EWHC 4019 (Ch) the court held that, where TPR issues contribution notices to multiple companies in a group in these circumstances, they may each specify an amount up to the section 75 debt. The pension scheme would be permitted to recover an aggregate sum in excess of the section 75 debt on the basis that a contribution notice created a new obligation of its own.

11.8.2.3  When is it reasonable for TPR to act in this way? There are certain matters which TPR must consider when deciding whether it would be reasonable to issue an FSD or contribution notice. In the case of an FSD, these include the person’s financial resources, any connection or involvement they had or have with the pension scheme, the relationship they have or had with the employer, including whether they have ‘control’ and the value of any benefits received directly or indirectly by the other person from the employer (ss 43(5)(b) and 43(7) of the Pensions Act 2004). In the case of a contribution notice, TPR must have regard both to the extent to which, in all the circumstances of the case, it was reasonable for the person to act, or fail to act, in the way they did and such other matters as TPR considers relevant, but including (where relevant): •

the matters already listed above for an FSD;

•

the person’s degree of involvement and the purposes of the act or failure to act (including whether the purpose was to prevent or limit loss of employment), whether the act or failure to act involved failure to report a notifiable event (see Table 11.6) that was not notified and the likelihood of other creditors being paid; and

•

the effect on the value of the assets or liabilities of the scheme or any relevant transferee scheme

(sections 38(3)(d) and 38(7) of the Pensions Act 2004).

11.8.2.4  When have FSDs and contribution notices been used in practice? In 2008, TPR issued its first ever FSD to Sea Containers Limited (‘SCL’), the Bermudan parent of an English service company. The latter was the principal employer of two final salary pension schemes with significant deficits. In assessing the benefits received by SCL here, it was noted that not only had SCL received services from the employer for which it did not have to pay within normal commercial timescales, but it could also maintain a European trading presence through the employer while itself enjoying a favourable tax regime in Bermuda. The fact that SCL had just entered into formal insolvency in the USA did not prevent the FSD being made. In 2010, TPR issued its first ever contribution notice to Michel Van De Wiele NV, the Belgian parent company of the Bonas textile machinery business. The group had been restructured via a pre-packaged insolvency process, leaving the group’s liabilities to its UK pension scheme behind. The parent was ordered to pay £5 million to restore the scheme to solvency. On appeal, however, it was held that this order was excessive 328

Restructuring 11.8 and that the amount sought through the contribution notice should simply seek to compensate the pension scheme for the detriment caused by the parent’s actions. The loss to the pension scheme from the pre-pack was limited to any undervalue in the price paid. The court left this to be determined, but in June 2011 TPR reached a compromise with the parent and re-issued it with a contribution notice for £60,000. In 2010, TPR issued FSDs against a number of companies in the Lehman Brothers group, and separately against a number of companies in the Nortel group. Various of these companies were already in administration in England at the time the notice was issued. The Court of Appeal (and the High Court before it) concluded that the liability under the FSDs was an administration expense. However, the fact that this meant that TPR could, if it so chose, delay the issue of an FSD, and thus improve its ranking in the insolvency process, caused significant debate. The Supreme Court ultimately reversed the Court of Appeal’s decision and held that liabilities under FSDs and contribution notices issued after a company has entered into insolvency rank as ordinary provable debts (Bloom v Pensions Regulator [2013] UKSC 52). In 2011, TPR issued FSDs against five companies in the ITV group, requiring them to address an estimated funding deficit of £115 million in the Box Clever Group Pension Scheme. Box Clever was a joint venture which had been entered into in June 2000 between Granada (now ITV) and Thorn. The pension scheme was established after Granada and Thorn sold their TV rental businesses to that joint venture. However, Granada and Thorn were never employers in the Box Clever Pension Scheme. In 2018, the Upper Tribunal found that TPR had had jurisdiction to issue the FSDs and that it was reasonable for it to do so. This decision was subsequently appealed in 2019 and dismissed. The decision clarifies the scope of TPR’s moral hazard powers and confirms that FSDs are not fault based (Granada UK Rental and Retail Ltd v Pensions Regulator [2019] EWCA Civ 1032). In 2016, events surrounding the collapse of the retail chain BHS in 2015 and its impact on the BHS Pension Scheme resulted in TPR issuing two contribution notices totalling £9.5 million to Dominic Chappell, the director and 90% shareholder of the buyer of BHS. A  wider parliamentary review of the regulation of defined benefit pension schemes (including TPR’s moral hazard powers) also took place in the light of events surrounding BHS, which led to the version of the legislation in place today. Finally, in 2021/22, TPR issued a contribution notice for up to £2.3 million against SMT Scharf AG, a German company, for its role in a transaction which resulted in the insolvency of the employers of the Dosco Overseas Engineering Limited (1973) Pension & Assurance Scheme, and reduced benefits for members. Unreported, other than in a section 89 report released by TPR, the quantum of the contribution notice (at little over £2 million) addressed the loss caused to the pension scheme by the conduct and was significantly less than the estimated section 75 debt amount of over £38 million. The decision indicates that a contribution notice would not necessarily extend to the full amount of the section 75 debt if that exceeds the loss caused.

11.8.3  Criminal offences 11.8.3.1  What offences exist? Since 2021, three key criminal offences have also been prosecutable by TPR, the Secretary of State or the Director of Public Prosecutions. These are: 329

11.8  Restructuring •

failing to comply with a contribution notice. This is committed where the recipient of a contribution notice fails, without reasonable excuse, to make a payment due under the contribution notice (s 42A Pensions Act 2004);

•

avoidance of an employer debt. This is committed by any person who, without a reasonable excuse, intentionally acts or engages in a course of conduct which prevents the recovery of all or part of an employer debt in relation to a pension scheme, prevents such a debt from becoming due, compromises or otherwise settles such a debt or reduces the amount of such a debt which would otherwise become due (s 58A Pensions Act 2004);

•

conduct risking accrued scheme benefits. This is committed by any person who, without reasonable excuse, acts or engages in a course of conduct which detrimentally affects in a material way the likelihood of accrued scheme benefits being received and either knew or ought to have known that their actions would have such an impact (s 58B Pensions Act 2004).

The first offence can only be committed by a sponsoring employer of a defined benefit pension scheme or parties that are associated or connected with such an employer. A person convicted of these offences can be subject to an unlimited fine. The second and third offences can be committed by any person. Unlike contribution notices and FSDs, the potential targets of criminal prosecution are therefore not limited to the sponsoring employer of a defined benefit pension scheme or parties that are associated or connected with the sponsoring employer. Insolvency practitioners are however excluded from the scope of these offences provided that they were acting within their functions as an insolvency practitioner. A  person convicted of these offences can be subject to an unlimited fine and/or imprisonment for up to seven years. Persons convicted of all three offences can also be subject to a civil penalty of up to £1 million. The amendments to the Pensions Act 2004 which introduced these criminal offences came into force on 1  October 2021 and they will not have retrospective effect. However, TPR has made it clear that it may consider evidence pre-dating October 2021 where relevant to the prosecution, for example if it indicates a potential target’s intention.

11.8.3.2  What amounts to a reasonable excuse? The burden will be on the prosecution to determine that the person had no reasonable excuse for their course of conduct. TPR, however, does not expect that it will be required to identify and disprove every potential excuse open to a person. TPR expects those it investigates to put forward an explanation for their conduct and provide sufficient evidence from contemporaneous records to establish a reasonable excuse. According to a prosecution policy published by TPR, TPR will take into consideration three key factors when determining whether a reasonable excuse exists in any given case: •

the extent to which the detriment to the scheme was an incidental consequence of the person’s act or omission; 330

Restructuring 11.8 •

whether there was adequate mitigation provided to offset any detrimental impact;

•

where no, or inadequate, mitigation was provided, whether there was a viable alternative which would have avoided or reduced the detrimental impact.

The prosecution policy also states that TPR may consider the following (where relevant) in determining whether a person has a reasonable excuse: •

the extent of any communication and consultation with the trustees prior to the act or omission;

•

in the case of a person who owes fiduciary duties to the scheme, whether they complied with those duties when doing the act of carrying out the course of conduct;

•

where the person was acting in a professional capacity, whether they acted in accordance with the applicable professional duties, conduct obligations and ethical standards.

TPR also states in its policy that proposing or acting in accordance with a Restructuring Plan is likely to be considered a reasonable excuse provided that the scheme is compliant with the legislative conditions and relevant information has been shared with TPR, the trustees and the PPF. Similarly, a reasonable excuse is likely to be established where a person proposes, or acts in accordance with, a CVA provided that the scheme’s creditor interest has been fairly valued, the scheme (via the PPF) had the opportunity to vote in the CVA and relevant information has been shared with the trustees and the PPF.

11.8.4  The clearance procedure 11.8.4.1  What is ‘clearance’? Clearly, there will be various associated or connected persons who are at least potentially at risk of receiving an FSD or a contribution notice. These might include other group companies or shareholders (including potentially lenders who have converted their debt to voting shares in a debt to equity swap). To limit uncertainty, there is a formal procedure whereby parties involved in a restructuring can apply to TPR for confirmation that it will not impose a liability on them in this way. This confirmation is known as a clearance statement and made pursuant to ss  42 and 46 Pensions Act 2004. A  clearance statement will not offer legal protection from prosecution under the criminal offences described in Section 11.8.3.1 but may demonstrate active engagement with TPR and therefore reduce the likelihood of criminal prosecution. TPR encourages groups to apply whenever a transaction is materially detrimental to the pension scheme either because it will reduce the employer’s ability to fund the scheme or because it will reduce the pension scheme’s recoveries on insolvency. TPR expects applicants to ‘mitigate’ any material detriment as a condition of any clearance statement. TPR’s expectation is that the group and the trustees will negotiate terms between them, and the application for clearance will present the jointly agreed terms to TPR. In this process, TPR expects the trustees to behave as would any other unsecured 331

11.8  Restructuring creditor in their position. Because of the requirements for ‘mitigation’ and for agreement with the trustees, the application may become time-consuming and costly, and this will be a factor in deciding whether to make an application in some cases. The group should make full disclosure to TPR of all relevant matters. A clearance can later be set aside if the circumstances described in the application are not the same as those which actually occur and the difference is material to TPR’s ability to exercise its powers.

11.8.4.2  When should clearance be sought? TPR has issued guidance indicating when it would expect a clearance application to be made (see https://www.thepensionsregulator.gov.uk/en/document-library/regulatoryguidance/clearance). Essentially, the employer and persons associated or connected with it need to apply where they consider that an event will occur which would be materially detrimental to the pension scheme’s ability to provide members’ benefits (known as ‘Type-A events’). The guidance divides such events into employer-related and scheme-related events. Employer-related events are events which occur in relation to the employer or the group generally which could weaken the employer’s ability to meet its obligations to the scheme. Events which TPR has identified as falling into this category include: •

granting or extending of new security over group assets;

•

paying dividends or returning capital to shareholders;

•

a change in group structure, including a change of control; or

•

a ‘phoenix event’, ie  an event resulting in the employer re-emerging as substantially the same entity following an insolvency event.

Scheme-related events are events which affect the scheme directly, such as a compromise of the employer’s debt to the scheme. Whilst employer-related events normally only require clearance when the scheme is in deficit on one of a number of bases, scheme-related events always require clearance.

11.8.5  Compromising a pension scheme deficit 11.8.5.1  Who will be involved in any discussions? The trustees have the ability to compromise the section 75 debt with the employer prior to any formal insolvency. However, they would not normally agree to any arrangement which places the scheme members in a worse position than they would be in on a formal insolvency. Any such compromise must now follow one of the statutory processes set out in the Occupational Pension Scheme (Employer Debt) Regulations 2005 (the ‘Employer Debt Regulations’). The trustees will also be conscious that, if not entered into at the right time or in accordance with the relevant statutory processes, any compromise they reach could render the scheme ineligible for the PPF should the employer later enter into formal insolvency. The PPF, however, is concerned to ensure that it receives fair treatment in any insolvency process and that schemes are not transferred to the PPF with less than 332

Restructuring 11.8 the expected dividend in respect of the section 75 debt. The PPF has called upon TPR to use its moral hazard powers to ensure there is no abuse. Therefore, where a section 75 debt is to be compromised as part of a restructuring, each of the trustees, the PPF and TPR will be involved in any negotiation process. The group will need to demonstrate that the employer could no longer survive if it had to continue to meet its existing pension liabilities and that the compromise will lead to a better recovery for the PPF than the likely alternative, bearing in mind, among other things, that in granting clearance TPR will be giving up the opportunity to recover monies for the PPF from third parties by issuing an FSD or contribution notice in relation to the compromise. The PPF will aim to ensure that it gains an appropriate share in any upside from the restructured business. Its standard practice is to seek a non-voting shareholding in the amount of one-third if the existing stakeholders are to remain owners following the restructuring, or one-tenth if the business is transferred to an unconnected party. To support the PPF, TPR will generally not give clearance on a restructuring that results in the pension scheme transferring to the PPF, unless the PPF is satisfied with the arrangement. A  recent example of a compromise was seen in the restructure of the Monarch Airlines group in 2014. This involved the compromise of the funding deficit in the pension scheme in circumstances where the group’s insolvency would have resulted in minimal recoveries. The restructure involved a statutory ‘regulatory apportionment arrangement’ under the Employer Debt Regulations. As part of the proposed sale of the Monarch Group to Greybull Capital, the shareholders of the Monarch Group agreed to make lump sum contributions of £30 million and write off debts and preference shares in excess of £80 million. The PPF also took a 10% equity stake in the new restructured business. The Monarch Group was able to provide evidence of concessions made by other creditors, including the termination or renegotiation of leases and staff pay cuts, which showed that the pension scheme was being treated fairly when compared to other unsecured creditors.

11.8.5.2  Which entity will enter into formal insolvency? One option is for the employer’s business to be sold to a new company through a pre-packaged administration. This will involve a planned formal insolvency of the scheme’s principal employer to transfer the pension scheme to the PPF. The PPF would then take its non-voting shareholding in the new company and would receive a dividend in respect of the section 75 debt from the formal insolvency of the employer. Where the existing employer is a trading company, a sale of its business through prepackaged insolvency may still prove disruptive. However, a route to avoid this was approved by the court in L v M Ltd [2006] EWHC 3395 (Ch). A new company was formed to convert the pension scheme in question into a multi-employer scheme, and took on a couple of employees for this purpose. The scheme rules were amended to provide that, on a winding-up of the scheme, the trading company would bear only £1 of the section 75 debt and the new company the balance. Once the scheme was wound up, the trading company paid the £1 debt and ceased to be an employer for the purposes of the scheme. The new company was unable to pay the balance of the section 75 debt, but on its inevitable insolvency, the pension scheme was able to transfer to the PPF. It is understood that the PPF took a shareholding in the surviving trading company. 333

11.8  Restructuring The process has since become a recognised structure. However, for the scheme to be eligible for PPF transfer, the modifications required to apportion the trading company’s employer debt to the new company would now need to be carried out in accordance with one of the statutory processes set out in the Employer Debt Regulations. (The relevant process here is most likely to be a ‘regulated apportionment arrangement’ as PPF involvement is likely within the next 12 months, as per reg 7A of the Employer Debt Regulations.)

334

Chapter 12

Cross-border issues

12.1 INTRODUCTION The chapter deals with the legal considerations which may be relevant in England where there is an international element to the insolvency of a company or a group of companies. This may be because one or more companies in the group are registered in other jurisdictions, or because business is carried on overseas. Three main legislative provisions are considered in this chapter: •

the Retained EU Insolvency Regulation;

•

the Cross-Border Insolvency Regulations 2006; and

• s 426 IA 1986. None of these provisions seeks to change the rules governing the different insolvency processes already described in this book. Instead, they deal essentially with the use of English insolvency proceedings in circumstances where there might be one or more other jurisdictions in which insolvency proceedings might also conceivably be opened for that company, and with the circumstances in which the English courts will assist in relation to foreign insolvency proceedings. Even where none of these legislative provisions applies, however, the English courts have on occasions held that English common law will apply, allowing them to assist in relation to foreign insolvency proceedings, and this is also therefore considered in this chapter. Finally, this chapter will specifically consider the circumstances in which the formal processes described in this book might be applicable to foreign companies.

12.2  THE RETAINED EU INSOLVENCY REGULATION 12.2.1  What is the Retained EU Insolvency Regulation? Prior to the UK leaving the European Union, Regulation (UK) 2012/848 of the European Parliament and of the Council of 20 May 2015 on insolvency proceedings (the ‘EU  Insolvency Regulation’) was directly applicable in the UK. The EU Insolvency Regulation does not seek to harmonise the different insolvency laws of the various Member States. It does, however, set out rules which: •

govern when such proceedings can be opened in any Member State;

•

require that proceedings which have properly been opened are recognised by the courts of other Member States; and

•

determine which Member State’s laws will apply once proceedings have been opened. 335

12.2  Cross-border issues It still applies to insolvency proceedings opened in the UK on or after 26 June 2017 but before 11 pm on 31 December 2020, which was the date on which the UK left the EU. Where insolvency proceedings were opened before that date, the previous version of the current regulation, Regulation (EC) No 1346/2000, will continue to apply to those proceedings. However, further discussion of either of these regulations is beyond the scope of this book. Although the EU Insolvency Regulation was preserved in UK law by the European Union (Withdrawal) Act 2018, various of its provisions were either amended or disapplied by the Insolvency (Amendment) (EU Exit) Regulations 2019 (SI 2019/146) (as amended) (the ‘Exit Regulations’). Accordingly, the resulting legislation (the ‘Retained EU  Insolvency Regulation’) contains only those provisions of the EU Insolvency Regulation that the UK decided to retain within its domestic legislation following its departure from the EU. In practice, it retains, in amended form, only the main operative provisions, or ‘Articles’, of the EU Insolvency Regulation which govern when proceedings may be opened. In addition to its Articles, however, the EU  Insolvency Regulation starts with a lengthy preamble containing various recitals. The Exit Regulations are silent as to the status of these recitals, so the English courts might conceivably still refer to them as a guide to interpretation where the relevant Article is unclear or imprecise. Certain of these recitals will be referred to in this Section 12.2. The Retained EU Insolvency Regulation applies to insolvency proceedings opened in England after 11 pm on 31 December 2020. Because it only has domestic status, there will be no automatic recognition of proceedings opened in EU Member States. This contrasts with the previous position under the EU Insolvency Regulation.

12.2.2  To what types of proceedings will it apply? So far as companies are concerned, the Retained EU Insolvency Regulation applies to: •

winding up by or under the supervision of the court;

•

creditors’ voluntary winding up with confirmation by the court;

•

administration, including appointments made by filing prescribed documents with the court; and

•

voluntary arrangements under insolvency legislation

(Article 1(1B) of the Retained EU Insolvency Regulation). However, it does not apply to insolvency proceedings concerning insurance undertakings, creditor institutions, investment undertakings which provide services involving the holding of funds or securities for third parties, or to ‘collective investment undertakings’ (Art 1(2) of the Retained EU Insolvency Regulation).

12.2.3  When is there jurisdiction to open proceedings? Article 1(1A) of the Retained EU Insolvency Regulation states that there is jurisdiction to open the proceedings listed in Section 12.2.2 where the proceedings are opened for the purposes of rescue, adjustment of debt, reorganisation or liquidation, and: 336

Cross-border issues 12.2 •

the company’s centre of main interests, or ‘COMI’ is in the United Kingdom (Art 1(1A)(a)); or

•

the company’s COMI is in an EU  Member State (other than Denmark) and there is an establishment in the UK (Art 1(1A)(b)).

Article 1 of the Retained EU Insolvency Regulation makes it clear that the grounds for jurisdiction to open insolvency proceedings in relation to the proceedings listed in Section 12.2.2 are in addition to any grounds for jurisdiction to open such proceedings which apply in the laws of any part of the United Kingdom. A court seised of a request to open insolvency proceedings is required of its own motion to examine whether it has jurisdiction pursuant to Art (1A). Where there is such jurisdiction, the judgment opening proceedings must state which of Art (1A)(a) and Art (1A)(b) is applicable (Art 4(1) of the Retained EU  Insolvency Regulation). Where insolvency proceedings are opened without a decision of the court, the insolvency practitioner appointed in such proceedings must examine the grounds on which there is jurisdiction to open the proceedings. If they are satisfied that there is such jurisdiction under Art 1A, the insolvency practitioner must again specify which of Art (1A)(a) and Art (1A)(b) is applicable (Art 4(2) of the Retained EU Insolvency Regulation). So far as a creditors’ voluntary winding up is concerned, there is a procedure whereby a liquidator appointed by a members’ resolution might subsequently apply for a court order confirming their appointment (rr 21.4 and 21.5 IR 2016). Such an application was granted in Re TXU Europe German Finance BV [2005] BCC 90, for example. There is no similar process for confirming an ‘out-of-court’ appointment of an administrator. The best practice is probably therefore to appoint the administrator by application to the court when appointing over a foreign registered entity whose COMI is in the United Kingdom. (Re Kaupthing Capital Partners II Master LP Inc [2010] EWHC 836 (Ch) is an illustration of the disadvantages of making an out-ofcourt appointment in the latter situation, albeit a key issue in that case involved the incorrect use of a form prescribed by rules which have now been superseded.)

12.2.4  Where will a company’s COMI be? 12.2.4.1  How is COMI ascertained? Article 3(1) of the Retained EU Insolvency Regulation states that a company’s COMI will be the place where the company conducts the administration of its interests on a regular basis and which is ascertainable by third parties. The place of a company’s registered office is presumed to be its COMI in the absence of proof to the contrary (the ‘registered office presumption’). However, this presumption only applies if the registered office has not been moved from the United Kingdom to an EU Member State or to the United Kingdom from an EU Member State within the three-month period prior to the request for the opening of insolvency proceedings (see Section 12.2.4.3). In addition, Recital (30) makes it clear that the registered office presumption is rebuttable. 337

12.2  Cross-border issues

12.2.4.2  When is it possible to rebut the registered office presumption? There is already a substantial body of case law as to when the registered office presumption might be rebutted for the purposes of the EU  Insolvency Regulation and its predecessor. In the case of BUJ Architects LLP v Investin Quay House Ltd [2021] EWHC 2371 (Ch), the court made it clear that it would continue to take that case law into account when determining that same question for the purposes of the Retained EU Insolvency Regulation. In the Eurofood case, which was decided under the predecessor to the current EU  Insolvency Regulation, the creditor wished to commence local recovery proceedings whereas the extraordinary administrator of the parent wished to include the subsidiary within a group-wide restructuring procedure. The Irish courts upheld the registered office presumption (as reported at [2004]  BCC  383). The case was referred to the European Court of Justice, or ‘ECJ’ which took a similar view (reported at [2006] Ch 508). The full facts are set out in the box below. The ECJ made it clear that: •

Where the registered offices of a parent company and its subsidiary are in two different Member States, the registered office presumption could only be rebutted if factors which were both objective and ascertainable by third parties enabled it to be established that the actual situation differed from the presumed position.

•

That could be the case where the subsidiary carried out no business in the Member State in which its registered office was situated, ie  it was merely a ‘letter-box’ company.

•

However, where the subsidiary did carry on its business in the territory of the Member State of its registered office, the mere fact that its economic choices are, or can be, controlled by a parent company in another Member State was not enough to rebut the presumption.

The ECJ gave no further guidance in Eurofood as to what other factors might be relevant in rebutting the presumption. The ECJ did, however, consider this question further in another case, Interedil Srl (in liquidation) v Fallimento Interedil Srl (Case C-396/09) (reported at [2012] Bus LR  1582). Here, it emphasised the need to attach greater importance to the place of the company’s central administration. However, this must still be established by objective factors which are ascertainable by third parties. This requirement may be considered to be met where the material factors have been made public, or at the very least, made sufficiently accessible to enable third parties, in particular the company’s creditors, to be aware of them. The ECJ then gave the following additional guidance: •

Factors to be taken into account when analysing whether the registered office presumption has been rebutted include, in particular, all places in which the debtor company pursues economic activities and all those in which it holds assets, insofar as those places are ascertainable by third parties. Such factors must be assessed in a comprehensive manner, taking into account the individual circumstances of each particular case. 338

Cross-border issues 12.2 •

Where a company’s place of central administration is in the same jurisdiction as its registered office, the registered office presumption cannot be rebutted.

•

Where a company’s place of central administration is not in the same place as its registered office, the presence of assets belonging to the debtor and the existence of contracts for financial exploitation of those assets in a Member State other than that in which the registered office is situated cannot be regarded as sufficient factors to rebut the registered office presumption, unless a comprehensive assessment of all the relevant factors makes it possible to establish, in a manner that is ascertainable by third parties, that the company’s central administration is located in that other Member State.

In a third case, Rastelli Davide e C. Snc v Jean-Charles Hidoux, as liquidator of Médiasucre International (C-191/10), the ECJ held that, where two companies have their registered offices in separate Member States, the mere finding that the two companies’ property had been intermixed is not enough to rebut the registered office presumption. The current EU  Insolvency Regulation came into force after the above cases had been decided, but its recitals are consistent with the ECJ’s decisions. Thus: •

Recital (28) indicates that, when determining whether the COMI is ascertainable by third parties, special consideration should be given to the creditors and to their perception of where the company conducts the administration of its interests.

•

Recital (30) goes on to say that it should be possible to rebut the presumption where the company’s central administration is located in a Member State other than that of its registered office, and where a comprehensive assessment of all of the relevant factors establishes, in a manner that is ascertainable by third parties, that the company’s actual centre of management and supervision and of the management of its interests is located in that other Member State.

•

Finally, Recital (32) indicates that, where the circumstances or the matter give rise to doubts about the court’s jurisdiction, the court should require the company to submit additional evidence to support its assertions and, where the law applicable to the insolvency proceedings so allows, give the company’s creditors the opportunity to present their views on the question of jurisdiction.

In the early days of the predecessor to the current EU  Insolvency Regulation, the English courts had often taken the view that the registered office presumption was not a particularly strong presumption. They were prepared to accept that it could be rebutted where the head office functions of a group were performed in a Member State other than that in which the registered office was situated, or where the directors of the company lived and took their decisions in a different Member State. However, the Court of Appeal has since emphasised that, in the light of Eurofood this test placed too little emphasis on objective factors ascertainable to third parties (Stanford International Bank Ltd (In Receivership) [2010] EWCA Civ 137). In East-West Logistics LLP v Melars Group Limited [2022] EWCA Civ 1419, which concerned a company registered in Malta, the Court of Appeal also emphasised that in order to rebut the registered office presumption it was insufficient just to demonstrate that the company carried out no activities in the jurisdiction where it was registered. The party seeking to rebut the presumption needed to demonstrate that COMI was elsewhere by reference to matters ascertainable by third party creditors. The case also illustrates more generally the difficulties in rebutting the presumption where a company is trading virtually. 339

12.2  Cross-border issues The Eurofood case Eurofood IFSC Ltd (‘Eurofood’) was an Irish-registered subsidiary of an Italian parent, Parmalat SpA. Eurofood was also tax resident and regulated in Ireland. It had two Italian executive directors and two Irish non-executive directors. It existed primarily to provide financing facilities for other companies in the Parmalat group, and among other things it had entered into a swaps transaction with Bank of America (‘BoA’). In December 2003, Parmalat SpA was admitted to extraordinary administration proceedings in Italy and Signor Enrico Bondi was appointed its extraordinary administrator. In January 2004, BoA presented a winding-up petition against Eurofood in Ireland and obtained the appointment of a provisional liquidator. The provisional liquidator duly notified Signor Bondi of his appointment. Notwithstanding this, in February 2004 an Italian court purported to place Eurofood into extraordinary administration in Italy. The winding-up petition was then duly heard by the Irish High Court. The Irish court was satisfied that Eurofood’s COMI was in Ireland as that was where BoA and its other finance creditors had ascertained it to be. It held that main insolvency proceedings had already been opened in Ireland by the time of the Italian judgment, so it did not need to consider the merits of that judgment. It also refused to recognise the Italian judgment on the basis of the public policy exemption, as BoA has been given no opportunity to be heard. Signor Bondi appealed, and the Irish Supreme Court referred various questions to the ECJ. The ECJ stated that: •

Where the registered offices of a parent company and its subsidiary are in two different Member States, the registered office presumption could only be rebutted if factors which were both objective and ascertainable by third parties enabled it to be established that the actual situation differed from the presumed position. That could be the case where the subsidiary carried out no business in the Member State in which its registered office was situated. However, where the subsidiary did carry on its business in the territory of the Member State of its registered office, the mere fact that its economic choices are or can be controlled by a parent company in another Member State was not enough to rebut the presumption.

•

The court of a Member State hearing an application for the opening of main insolvency proceedings should check that it has jurisdiction. However, once main insolvency proceedings have been opened in one Member State, a party which took the view that the company’s COMI was situated in a different Member State must challenge the decision to open main insolvency proceedings before the courts of the Member State in which proceedings had been opened.

•

Main insolvency proceedings had been opened when the Irish provisional liquidator had been appointed. An Irish provisional liquidator was one of the types of liquidator referred to in Annex C to Regulation (EC) No 1346/2000 (the predecessor to the present Annex B) and, when appointing him, the Irish court had ordered that the company be divested. In light of this, the ECJ considered that it had no need to determine whether the presentation of the winding-up petition in itself constituted the opening of insolvency proceedings. 340

Cross-border issues 12.2 •

A Member State may refuse to recognise insolvency proceedings opened in another Member State where the decision to open the proceedings was taken in flagrant breach of the fundamental right to be heard which a person concerned by such proceedings enjoys.

12.2.4.3  Can a company’s COMI change? A company’s COMI may change during its lifetime. The ECJ has held that it is the court of the Member State where the debtor’s COMI is situated at the time the debtor lodges the request to open insolvency proceedings which has jurisdiction to open those proceedings, even if the debtor moves its COMI to another Member State after lodging the request but before the proceedings are opened (Re Staubitz-Schreiber (C1/04), reported at [2006] BCC 639). A company may therefore deliberately move its COMI to a different Member State in order to take advantage of what it perceives to be a more favourable insolvency regime, a process often termed ‘forum shopping’. Whilst the Retained EU Insolvency Regulation does not attempt to prevent forum shopping, like the EU Insolvency Regulation it does contain a number of safeguards aimed at preventing fraudulent or abusive forum shopping. As such: •

as already noted in Section 12.2.4.1, Article 3(1) indicates that the registered office presumption only applies if the registered office has not moved to or from the United Kingdom within the three-month period prior to the request for the opening of insolvency proceedings;

•

Article  (28) goes on to say that, in the event of a shift of COMI, it may be necessary to inform creditors of the new location from which the company is carrying on its activities in due course, for example, by drawing attention to the change in address in commercial correspondence, or by making the new location public through other appropriate means.

Many of the cases where a company has changed or attempted to change its COMI pre-date the EU  Insolvency Regulation, but it seems likely that the following examples would remain applicable. In Re Hellas Telecommunications (Luxembourg) II SCA [2009] EWHC 3199 (Ch), a financing and holding company wished to migrate its COMI to the UK to take advantage of the administration procedure in order to carry out a pre-pack should restructuring negotiations with creditors fail. In seeking to achieve this: •

its head office and principal operating address were moved to London;

•

its creditors were given contemporaneous notice of its change of address and an announcement was made by way of a press release that its activities were shifting to England;

•

it opened a bank account in London and all significant payments were then made into and from that bank account, although it retained a bank account in Luxembourg to deal with minor miscellaneous payments;

•

it registered under the Companies Act in this country, although its registered office remained in Luxembourg; and

•

all negotiations between it and its creditors took place in London. 341

12.3  Cross-border issues In making the administration order sought, the court regarded this last step as particularly important, given the need for creditors in particular to know where the company was and where they may deal with the company. The case of Hans Brochier Holdings Limited v Exner [2007]  BCC  127, however, provides an example of a migration which was held not to have moved the relevant entity’s COMI. The assets and liabilities of a German company had been transferred to an English company, Hans Brochier Holdings Limited, by a process known as universal succession. The English company subsequently encountered difficulties, and its directors appointed English administrators. However, when further information came to light, the administrators themselves applied for a declaration that the COMI was in Germany. Applying the Eurofood decision, the English court held that this was the only possible conclusion it could reach on the basis of the objective and ascertainable facts. Among other things, the vast majority of the company’s employees worked in Germany, its entire business operation was run from Germany, and most of its banking continued to operate through German bank accounts. This suggests that it is more difficult to migrate the COMI of a trading company than it is to migrate the COMI of a holding company.

12.2.5  Where will a company have an establishment? An establishment is defined to mean ‘any place of operations where the company carries out or has carried out in the three-month period prior to the request to open insolvency proceedings, a non-transitory economic activity with human means and assets’ (Art 2(10) of the Retained EU Insolvency Regulation). In the Interedil case, the ECJ made it clear that an establishment requires the presence of a structure consisting of a minimum level of organisation and a degree of stability necessary for the purpose of pursuing an economic activity. The presence of goods in isolation or bank accounts would not, in principle, meet the definition. The existence of an establishment must be determined in the same manner as a company’s COMI, ie on the basis of objective factors which are ascertainable by third parties. In Re Office Metro Limited [2012] EWHC 1191 (Ch), it was held that a company which had transferred its main headquarters and place of administration to Luxembourg and retained only an English registered office from which another group company continued to deal on its behalf with demands under certain guarantees had no establishment in the United Kingdom. In Re Olympic Airlines SA [2015] UKSC 27, the Supreme Court similarly determined that an office from which three individuals, retained on short-term contracts, were winding down a company’s affairs was not an establishment. However, the Olympic case was decided before the three-month ‘look back’ rule in the present EU Insolvency Regulation came into being and, on the facts of that case, this might now produce a different result.

12.3  THE CROSS-BORDER INSOLVENCY REGULATIONS 2006 12.3.1  The UNCITRAL Model Law The Cross-Border Insolvency Regulations 2006 (the ‘CBIR’) adopt the UNCITRAL  Model Law on Cross-Border Insolvency into British domestic law. 342

Cross-border issues 12.3 ‘UNCITRAL’ is an abbreviation for the United Nations Commission on International Trade Law. Like the EU Insolvency Regulation, the Model Law does not attempt to harmonise local insolvency law. Instead, it is designed to assist states to equip their insolvency laws with a ‘modern, harmonised and fair’ framework to address instances of crossborder insolvency more effectively. However: •

Different states adopting the Model Law are given a degree of discretion as to how they do so. Therefore the fact that the law of one adopting state confers certain rights is no guarantee that the law of another adopting state will confer reciprocal rights.

•

The role of the Model Law is generally to enable the courts of the states which have adopted it to provide assistance where sought rather than to restrict their powers to do otherwise.

•

There is no higher authority than the courts of the individual states in respect of the Model Law.

At the time of writing, the Model Law has been adopted in 53 states in a total of 56 jurisdictions. (For a list of these, see https://uncitral.un.org/en/texts/insolvency/ modellaw/cross-border_insolvency/status.) The remainder of this section considers the Model Law as it has been adopted in Great Britain, the form of which is set out in Sch 1 to the CBIR.

12.3.2  When will the CBIR apply the Model Law in Great Britain? Under Art 1 Sch 1 to the CBIR, the Model Law applies where: •

assistance is sought in Great Britain by a foreign court or a foreign representative in connection with a foreign proceeding; or

•

assistance is sought in a foreign state in connection with a proceeding under British insolvency law; or

•

insolvency proceedings are taking place concurrently in a foreign state and Great Britain in respect of the same company; or

•

creditors or other interested persons in a foreign state have an interest in requesting the commencement of, or participating in proceedings under British insolvency law.

It is not essential that the state where the foreign court is located has itself adopted the Model Law. The courts have been prepared to use the CBIR to recognise a Norwegian bankruptcy as foreign main proceedings and the Norwegian trustee as a foreign representative, notwithstanding that Norway has not enacted the Model Law itself (Re European Insurance Agency AS, an unreported decision of the Bristol District Registry of the High Court noted by Ian Fletcher in Insolvency Intelligence 2007, 20(9), 138–141). The foreign representative will often be, but need not be, an insolvency practitioner. In Re 19 Entertainment Limited [2016]  EWHC  1545 (Ch), which concerned an 343

12.3  Cross-border issues English company in US Chapter 11 bankruptcy proceedings, the court held that the company and its directors were capable of being a foreign representative on the basis that the directors were continuing to manage the company’s business.

12.3.3  Recognition of foreign proceedings A  foreign representative can apply to the British courts for recognition of foreign proceedings where the company has a place of business or assets in Great Britain or if, for any other reason, Great Britain is an appropriate forum to consider a question or provide assistance (Art 4 Sch 1). The CBIR draws a distinction between two types of insolvency proceedings (see Art 2 Sch 1): •

foreign main proceedings, ie  proceedings taking place in the state in which the company has its ‘centre of main interests’, or COMI. COMI is not defined, but it was confirmed in Stanford International Bank Ltd (In Receivership) [2010]  EWCA  Civ 137 that the English courts will interpret it in the same manner as they would under the Retained EU  Insolvency Regulation (see Section 12.2.3).

•

foreign non-main proceedings, ie proceedings taking place in a state in which the company has an establishment. Establishment bears a similar definition to that used in the Retained EU Insolvency Regulation (see Section 12.2.4).

Foreign proceedings commenced in a state other than that of the company’s COMI and in which it has no establishment will not qualify for recognition. The court will need to determine COMI even where the application is unopposed. The case of Videology Limited [2018] EWHC 2186 (Ch) involved an English-registered subsidiary of a US-based group which filed for proceedings under Chapter 11 of the US Bankruptcy Code in the US then applied to the English court for recognition of these proceedings as foreign main proceedings under Art 17 CBIR on the basis that the company’s COMI was in the US. However, the English court determined that its COMI was in the United Kingdom and thus recognised the proceedings as foreign non-main proceedings. If foreign proceedings are recognised as foreign main proceedings, an automatic stay will apply. This will have the same effect in England as the stay in a compulsory liquidation (see Chapter  3). There will be a moratorium on certain types of creditor action, and on the ability of the company to transfer, encumber or dispose of assets. However, this stay will not affect a creditor’s right to enforce security over the company’s property or to exercise set-off in the same manner that the creditor could in a liquidation. In addition, it will not stay the commencement of British insolvency proceedings (Art 20 Sch 1). However, if British proceedings are subsequently commenced, their effect will be limited to assets in Britain (Art 28 Sch 1). In Nordic Trustee ASA v OGX Petroleo e Gas SA [2016] EWHC 25 (Ch) the court refused to permit the automatic stay to continue where it transpired that it would block claims which were expressly excluded from the foreign proceedings. For foreign non-main proceedings, no automatic stay will apply. 344

Cross-border issues 12.3

12.3.4  What types of relief might the court grant? Upon recognition of a foreign proceeding, whether main or non-main, the court has a discretion to grant various types of relief to protect the assets of the company or the interests of creditors including, as the last listed item, the grant of any additional relief that may be available to a British officeholder under the laws of Great Britain (Art 21 Sch 1). This has been used, for example: •

to provide the greater protection that an administration moratorium would afford when compared to the stay described above when it is clear than the foreign proceedings are more akin to an administration than to a liquidation, but also then to grant permission for certain proceedings to continue (Ronelp Marine Ltd v STX Offshore Shipbuilding Co Ltd [2016] EWHC 2228 (Ch) and NMC Healthcare Limited [2021] EWHC 1806 (Ch)); and

•

to allow a foreign officeholder to obtain the disclosure of information from third parties in circumstances similar to those in which an English officeholder could have obtained information in comparable English proceedings (Re Bernard L Madoff Investment Securities LLC [2010] EWHC 1299 (Ch)).

The CBIR will not provide foreign representatives with a route to apply decisions made in foreign courts and foreign law generally in Britain even where these are inconsistent with relevant British law. For example: •

the Supreme Court has confirmed that the CBIR cannot be used to enforce a judgment obtained in a foreign insolvency proceeding where the defendant has not appeared in those proceedings (Rubin v Eurofinance SA [2012] UKSC 46 – the facts of this case are set out in the box at the end of Section 12.5);

•

the courts have refused to allow the CBIR to be used as a means of restraining the exercise of termination rights under a contract governed by English law, albeit this was decided prior to the introduction of s  233B IA  1986 (Fibria Celulose S/A v Pan Ocean Co Ltd [2014] EWHC 2124 (Ch)); and

•

the court has held that, where a foreign bank had resumed trading after a restructuring, the CIBR could not be used to extend a stay of the claims of its English creditors indefinitely so as to defeat their rights under English law (Bakhshiyeva v Sberbank of Russia [2018] EWCA Civ 2802).

The court’s reasoning in the Sberbank case was that an indefinite stay would circumvent the long-established rule in Antony Gibbs & Sons v Societe Industrielle et Commerciale des Metaux (1890) 25 QBD 399 where contractual obligations can only be discharged by the law governing the contract, or where the beneficiary of those obligations agrees to the foreign jurisdiction in connection with the discharge of those obligations. In addition, to grant relief which continued beyond the termination of the relevant foreign proceeding would be inconsistent with the role of the Model Law.

12.3.5  Rights of access A  foreign representative in main or non-main proceedings is given direct access to the British courts to commence or participate in British insolvency proceedings (Arts 10 and 12 Sch 1). Foreign creditors are also given access to the British courts to commence and/or participate in British insolvency proceedings as creditors in Britain. They must not be given a lower priority than that of general unsecured claims solely because they are foreign (Art 13 Sch 1). 345

12.4  Cross-border issues In addition, a foreign representative may apply to the British courts for an order under or in connection with ss 238, 239, 244, 245 and 423 IA (ie various of the antiavoidance provisions described in Chapter 5). The British court may grant such an order even where no British administration and/or liquidation has been opened (Art 23 Sch 1).

12.3.6  Co-operation and co-ordination The British courts may co-operate to the maximum extent possible with foreign courts and foreign representatives (Art 25 Sch 1). British insolvency officeholders must co-operate to the maximum extent possible, to the extent that this is consistent with their other duties under British law (Art 26 Sch 1). The Model Law also sets out considerations which should be applied by a court when co-ordinating British proceedings with one or more concurrent foreign proceedings – it is relevant to some extent whether the British proceedings were commenced first and whether the foreign proceeding(s) are main or non-main proceedings (Arts 29 and 30 Sch.1).

12.3.7  What future changes might there be? The United Kingdom is currently consulting on whether to implement two further model laws adopted by UNCITRAL to complement the Model Law on Cross-Border Insolvency. These are: •

the Model Law on Recognition and Enforcement of Insolvency-Related Judgments, which deals with the cross-border recognition of judgments that are associated with insolvency proceedings; and

•

the Model Law on Enterprise Group Insolvency which provides tools to manage and coordinate insolvencies within corporate groups, while respecting that each company within that group retains its own separate legal personality.

The former model law provides states with the option of introducing a new ‘Article X’ into the existing Model Law on Cross-Border Insolvency rather than implementing it in full. This would expressly add recognition of insolvency-related judgments to the types of assistance that the court of that state can give. If the United Kingdom were to choose only to introduce this provision into the CBIR this would override the decision in the Rubin case but not affect the application of the rule in Gibbs.

12.4  SECTION 426 OF THE INSOLVENCY ACT 1986 12.4.1  What does s 426 IA 1986 do? Section 426 IA 1986 effectively fulfils two functions: •

it enables orders made by courts having insolvency jurisdiction in one part of the UK to be enforced in other parts of the UK (s 426(1) IA 1986). (However, a court is not required to enforce an order made in respect of property situated in territory over which it has jurisdiction where this order was made by a court in another part of the UK – s 426(2) IA 1986); and

•

it requires the courts having insolvency jurisdiction in one part of the UK to assist the courts having a corresponding jurisdiction in any other part of the UK or in any ‘relevant country or territory’ (s 426(4) IA 1986). 346

Cross-border issues 12.4 It is the latter function which will be considered further in this section. As at the date of this book, the relevant countries and territories are: Anguilla, Australia, the Bahamas, Bermuda, Botswana, Brunei Darussalam, Canada, the Cayman Islands, the Channel Islands, the Falkland Islands, Gibraltar, Hong Kong, Ireland, the Isle of Man, Malaysia, Montserrat, New Zealand, St Helena, South Africa, Turks and Caicos, Tuvalu and the Virgin Islands. (See s 426(11) IA 1986 and SI (1986/2123), SI (1996/253) and SI (1998/2766).) Whilst s 426 IA 1986 enables the courts of these non-UK countries and territories to send a letter of request to the English courts, it does not, however, empower the English courts in turn to request assistance from the courts of those jurisdictions.

12.4.2  What assistance can the English courts provide? Under s  426(5)  IA  1986, an English court receiving a letter of request has the authority to apply: • the insolvency laws of the referring court’s own jurisdiction; or • English insolvency law. Case law has confirmed that the courts can also apply their own inherent jurisdiction (see Hughes v Hannover-Rucksversicherungs AG [1997] BCC 921, which concerned a request from a Bermudan court to assist it by granting an injunction). The English courts must, however, have regard to the rule of private international law when exercising their discretion. Section 426 has therefore been used: • to authorise English provisional liquidators to hand over assets collected in an ancillary English process to Australian liquidators, notwithstanding the fact that Australian and English law differed as to how those assets would be distributed (McGrath v Riddell [2008] BCC 349); • to apply English formal insolvency processes to foreign companies where the referring state has no equivalent legislation. For example, the administration process has been applied to an Australian company (Re Dallhold Estates (UK) Pty Ltd [1992]  BCC  394) and the CVA process to an Isle of Man company (Re Television Trade Rentals [2002]  BCC  807). Given the provisions of the Retained EU  Insolvency Regulation, this type of assistance seems likely to be requested only when the foreign company’s COMI is outside the UK (and cannot conveniently be migrated to the UK) and where it possesses no establishment in the UK, but there will nevertheless be occasions where this will remain the case; and • to recognise and enforce an Australian judgment for unfair preferences where it was held that the defendant had submitted to the jurisdiction of the Australian court by filing proofs of debt and participating in creditors’ meetings in the Australian insolvency proceedings (New Cap Reinsurance Corpn Ltd v Grant, heard together with the Rubin case and reported at [2012] UKSC 46). The Supreme Court confirmed in the Rubin case, however, that s 426 could not be used to enforce a judgment obtained in a foreign insolvency proceeding where the defendant has not appeared in those proceedings. More generally, the English courts do have a limited discretion to refuse a request (see the Hughes case). Nonetheless it would be unusual for them to do so. 347

12.5  Cross-border issues

12.5  ENGLISH COMMON LAW Whilst it might be thought that common law principles would have become less relevant, given the various provisions described above, the courts have made it clear that they still have a role to play. A  key case here is Cambridge Gas Transportation Corpn v Official Committee of Unsecured Creditors of Navigator Holdings plc [2006] 3  All ER  829. This case concerned a letter of request from a US court to an Isle of Man court which fell outside of the scope of any of the provisions so far described in this chapter. The court made it clear, however, that there is still an underlying common law principle that bankruptcy proceedings should, ideally, have universal application and that there should be a single bankruptcy in which all creditors are entitled and required to prove. The court thought it doubtful that common law alone would allow it to apply provisions of foreign insolvency law which form no part of the domestic system. However, it considered that a domestic court must at least be able to provide assistance by doing whatever it could have done in the case of a domestic insolvency. The purpose of recognition is to enable the foreign officeholder or the creditors to avoid having to start parallel insolvency proceedings and to give them the remedies to which they would have been entitled if the equivalent proceedings had taken place in the domestic forum. In Schmitt v Deichmann [2012] EWHC 62 (Ch), for example, the court duly applied this principle to allow a German insolvency administrator to bring proceedings in England under s 423 IA in circumstances where again for various reasons, neither the predecessor to the present EU Insolvency Regulation nor the CBIR would assist. The courts have been keen to stress that there are boundaries to any principle of universal application: •

The Supreme Court concluded in the Rubin case that this principle would not require an English court to enforce a judgment obtained in foreign insolvency proceedings where the defendant had not appeared in those proceedings. Three of the five judges in Rubin suggested that Cambridge Gas might have been wrongly decided so far it might suggest otherwise, although they did not dispute the authority of that case more generally.

•

The Privy Council confirmed in Singularis Holdings Ltd v PricewaterhouseCoopers (Bermuda) [2014] UKPC 36 that the court does have a common law power to compel a third party to provide information that will assist a foreign insolvency officeholder in the conduct of insolvency proceedings in another jurisdiction. However, it emphasised that this power is subject to a number of limitations and in particular cannot be used to give the officeholder the power to do something that they would not be empowered to do under the law of their appointment.

Under the common law, the English courts will nevertheless almost always recognise the liquidation of a foreign company carried out under the laws of its place of incorporation (Baden, Delvaux & Lecuit v Société Générale pour Favorisor le Développement etc [1983]  BCLC  325). There are also various cases where they have recognised foreign rehabilitation proceedings carried out under the laws of the company’s place of incorporation (see, for example, Felixstowe Dock and Railway Co v United States Line Inc [1989] QB 360). 348

Cross-border issues 12.5 However, the case law suggests that they may still refer to English law principles in determining the nature and the degree of the assistance they will give. In the Felixstowe Dock case, the English courts were unprepared to grant an order which removed the foreign company’s English assets outside of the control of the English courts completely. Rubin v Eurofinance SA and New Cap Reinsurance Corpn Ltd v Grant [2012] UKSC 46 The Rubin case concerned a trust established by Eurofinance, a BVI registered company. The trustees were resident in England, although many of its beneficiaries and all of its assets were in the USA. The trust was placed into Chapter 11 in the USA. The US liquidators issued proceedings in the US against several parties, including the trustees, in respect of fraudulent conveyances and transfers under US law. The trustees did not participate in these proceedings nor submit to the jurisdiction of the US court. Nonetheless the US court considered that it had jurisdiction and gave judgment against them in default. The New Cap case concerned an Australian insurance company, New Cap. It had reinsured members of a Lloyds syndicate. New Cap entered liquidation in Australia. The liquidator issued proceedings in Australia against the syndicate seeking to recover payments made to them as unfair preferences under Australian law. Again, the syndicate did not participate in the unfair prejudice proceedings nor did they submit to the jurisdiction of the Australian court but the Australian court gave judgment against them. The syndicate did, however, take part in the Australian liquidation more generally, eg by filing proofs of debt. Both liquidators sought to enforce the judgments in England. This led eventually to the Supreme Court hearing both cases together on appeal and considering the various potential enforcement routes: •

Section 426 IA 1986 was relevant to New Cap (but not Rubin). The court drew a distinction between those sub-sections which dealt with assistance within the UK and those which dealt with assisting foreign courts. Unlike the former, the latter made no mention of enforcing judgments so could not be used for that purpose.

•

The CBIR were relevant to Rubin (but not New Cap, as the relevant events had taken place prior to their introduction). Again, these contained no express mention of enforcing foreign judgments, so did not give the court the power to do so.

•

Recognition under the common law was relevant in both cases. Whilst under normal common law rules a money judgment of a foreign court was enforceable in the UK only where the defendant had been present in the foreign jurisdiction when the proceedings commenced, had made a claim or counterclaim in those proceedings, or had submitted to the foreign jurisdiction either by agreement or choosing to appear in those proceedings, the court recognised that it was necessary to consider the matter broadly.

In New Cap, the court held that the syndicate had submitted to the proceedings as a result of its wider participation in liquidation – it took the view that the syndicate should not be allowed to benefit from the insolvency proceedings without complying with orders made in those proceedings. 349

12.6  Cross-border issues In Rubin, however, this argument did not apply so that question was whether, in the interests of universality of insolvency procedures, the courts should devise a rule for the recognition of judgments in foreign insolvency proceedings which was wider than the traditional common law rule. The majority concluded that it was not appropriate for the courts to do this. As part of their reasoning, the various judges considered the extent to which the Cambridge Gas case might have been wrongly decided, but differed in their conclusions in this respect.

12.6  APPLICATION OF ENGLISH FORMAL PROCESSES TO FOREIGN COMPANIES 12.6.1 Liquidation A  foreign company may be placed into either compulsory or creditors’ voluntary liquidation under the Retained EU Insolvency Regulation where the conditions for doing so are satisfied (see Section 12.2). As discussed in Chapter 1, under s 221 IA 1986, the English courts also have the jurisdiction to wind up any unregistered company if: •

the company is dissolved, or has ceased to carry on business, or is carrying on business only for the purposes of winding up its affairs;

•

the company is unable to pay its debts; and

•

the court is of the opinion that it is just and equitable that the company should be wound up.

An ‘unregistered company’ includes any association and any company, with the exception of a company registered under the CA  2006 in any part of the United Kingdom (s 220 IA 1986). A foreign company will therefore fall within this definition. Whilst on its face s 221 IA 1986 gives an English court unlimited jurisdiction, in practice the courts themselves have laid down constraints on when they will assume jurisdiction. In Re Real Estate Development Company [1991] BCLC 210, the court laid down three ‘core requirements’ which an English court will apply in deciding whether to wind up a foreign company: •

there must be a sufficient connection with England and Wales which may, but does not necessarily have to, consist of assets within the jurisdiction;

•

there must be a reasonable possibility, if a winding-up order is made, of benefit to those applying for the winding-up order;

•

one or more persons interested in the distribution of assets of the company must be persons over whom the court can exercise a jurisdiction.

12.6.2 Administration For the purposes of Sch B1 IA 1986 (ie the part of the IA 1986 which deals with administration), a ‘company’ means: 350

Cross-border issues 12.6 •

a company registered under the Companies Act 2006 in England and Wales or Scotland;

•

a company incorporated in an EEA State (ie as at the date of this book, the EU Member States, plus Iceland, Liechtenstein and Norway); or

•

a company not incorporated in an EEA  State but having its COMI in an EU Member State other than Denmark or in the United Kingdom

(see para  111(1A) Sch B1  IA  1986). This confirms the jurisdiction of the courts to place a foreign company into administration under the Retained EU Insolvency Regulation. Section 426  IA  1986 will also allow an English court to appoint an administrator pursuant to a letter of request from certain foreign courts (see Section 12.4).

12.6.3  Part A1 Moratorium For the purposes of Part A1 IA 1986, ie the part of the IA 1986 which deals with the Part A1 Moratorium, an ‘overseas’ company which is not subject to an outstanding winding-up petition and is otherwise eligible for the moratorium may apply to the court for a moratorium (s A5 IA 1986). The English courts will have jurisdiction to grant a moratorium to an overseas company if the court would have jurisdiction to wind-up the company. This means that instead of limiting the use of the Part A1 Moratorium to overseas companies that have their COMI in England the English courts could grant a moratorium where a company has a ‘sufficient connection’ to England. This is the same test that the court has applied in determining whether it has jurisdiction to sanction a Scheme of Arrangement of an overseas company, and the discussion in Section 12.6.5 will therefore apply equally to a Part A1 Moratorium.

12.6.4 CVA For the purposes of Part 1 IA 1986, ie the part of the IA 1986 which deals with CVAs, a ‘company’ is defined in the same way as it is for an administration (s 1 IA 1986). Section 426 IA 1986 will also apply as for an administration.

12.6.5  Schemes of Arrangement 12.6.5.1  When will the English courts have jurisdiction? For the purposes of Part 26 of the CA, ie  the part of CA  2006 which deals with Schemes of Arrangement, the term ‘company’ means ‘any company liable to be wound up under the Insolvency Act 1986’ (s 895 CA 2006). A Scheme can therefore extend to foreign companies, given that the court has the jurisdiction to wind such companies up (see Section 12.6.1). There is a complication here, however, in that the second and third of the ‘core requirements’ described in Section 12.6.1 will not always be appropriate to a Scheme. In Re Drax Holdings Ltd [2004] 1 WLR 1049, however, the court made it clear that the second and third core requirements were relevant to the discretion of the court, 351

12.6  Cross-border issues but not absolute preconditions to be met before the court could have jurisdiction in relation to a Scheme. The court was satisfied that it had jurisdiction because both companies had sufficient connection with England. This ‘sufficient connection’ test has been variously applied. For example: •

Rodenstock, where a German company has no assets in the United Kingdom likely to be affected by the Scheme but where the creditors who would be affected by the scheme were all senior lenders under a facility agreement which was expressed to be governed by English law and in which they had agreed that any dispute arising out of or in connection with the agreement would be subject to the exclusive jurisdiction of the English courts. The court held that this collective agreement had, in itself, created sufficient connection with England (Re Rodenstock GmbH [2011] EWHC 1104 (Ch)); and

•

Apcoa, where a German company which utilised the amendment and waiver provisions of its finance documents to amend the governing law of those finance documents to English law for the express purpose of creating a sufficient connection with England (Re Apcoa Parking Holdings GmbH and others [2014] EWHC 3849 (Ch).

The solution adopted in the Apcoa case, of amending a governing law clause in order to create a ‘sufficient connection’, is likely to be of limited application, as new facility agreements tend now to be drafted to guard against this. However, companies have found other solutions. For example: •

Magyar Telecom, where a Dutch company whose finance documents were governed by New York law moved its COMI to England in order to propose a Scheme of Arrangement (Re Magyar Telecom BV [2013] EWHC 3800 (Ch)).

•

Codere, where a Luxembourg company established a subsidiary in the UK to assume a primary joint and several liability in relation to its New York lawgoverned notes. The proposed Scheme then released the other co-obligors and guarantors at the same time, without the need for separate Schemes. The court did have reservations as to whether this was an ‘extreme form of forum shopping’, but was persuaded to sanction the Scheme in light of the fact that there were other connections with England, that it appeared to be in the best interests of the creditors, and that it enjoyed the support of close to 100% of those creditors (Codere Finance (UK) Limited [2015] EWHC 3778 (Ch)). A  similar ‘SPV co-debtor’ approach has been used in various other cases since then.

12.6.5.2  Recognition in foreign jurisdictions The court will not generally make an order which has no substantial effect and needs to be satisfied that the scheme will achieve its purpose. The court will therefore need to be satisfied that the scheme will be recognised in the key jurisdictions in which the relevant company has liabilities or assets as having compromised the creditors’ rights. Dissenting creditors could otherwise seek still to use their original rights to attach assets of the company. Although the court does not need certainty that the scheme will be recognised by the courts of those jurisdictions it requires credible evidence that there is at least a reasonable prospect that it will be recognised and given effect. 352

Cross-border issues 12.6 The company proposing the Scheme will therefore normally try to satisfy the court by providing expert evidence on the laws of those foreign jurisdictions. However, it may be necessary in some cases to apply separately for recognition in the foreign jurisdictions concerned. In particular, where the United States is a key jurisdiction it is common to take advantage of the fact that the US is also a party to the Model Law on Cross-Border Insolvency and request that the US court recognise the Scheme under Chapter 15 of the US Bankruptcy Code. The court has recently considered whether it was appropriate for it still to sanction the Scheme of a company incorporated in the Netherlands following the United Kingdom’s exit from the EU, given that the EU Regulation 1215/2012 on Jurisdiction and the Recognition and Enforcement of Judgments in Civil and Commercial Matters (the ‘EU Judgments Regulation’) would no longer require the courts of EU Member States to recognise the Scheme. However, the court noted that there had always been some uncertainly as to whether the EU Judgments Regulation applied to Schemes of Arrangement and that for the purposes of testing international effectiveness of a scheme in an EU  Member State the court had always wished to see additional credible evidence of its effectiveness. The fact that the company could no longer rely upon the EU Judgments Regulation was not therefore a decisive factor in itself (DTEK Energy BV and DTEK Finance PLC [2021] EWHC 1551 (Ch)). The court did, however, express reservations about a proposed Scheme where the Indonesian courts had held that the underlying debt governed by New York law was invalid, despite the fact that a New York court had given judgment on that debt – if the Indonesian court did not recognise a New York judgment in relation to a debt governed by New York law, it was hard to see how it would recognise a Scheme under English law (Re Indah Kiat International Finance Company BV [2016] EWHC 246 (Ch)).

12.6.6  Restructuring Plans For the purposes of Part 26A of the CA, ie the part of CA 2006 which deals with Restructuring Plans, the term ‘company’ means ‘any company liable to be wound up under the Insolvency Act 1986’ (s 901A(4) CA 2006). This is the same definition as was used in relation to a Scheme of Arrangement and so the discussion in Section 12.6.5 will also apply to a Restructuring Plan. Accordingly, for example, the court has sanctioned a Restructuring Plan for a Mauritian company that had moved its COMI to England, which led to the alteration of that company’s constitution and share capital (Re Smile Telecoms Holdings Limited [2022] EWHC 740 (Ch)). In Re Gategroup Guarantee Limited [2021] EWHC 304 (Ch), for reasons specific to that case, the court needed to hold that a Restructuring Plan fell outside the scope of the Lugano Convention (which covers similar territory to the EU Judgments Regulation but to which Switzerland is also a party) in order to establish jurisdiction. It achieved this by finding that a Restructuring Plan, unlike a Scheme of Arrangement, was a collective insolvency procedure. This distinction will be relevant to future Plans, both in the UK and in other jurisdictions. For example, if the Plan for Hong Kong Airlines Limited, which at the time of writing has only reached its convening hearing stage, is held to be an ‘insolvency event’ for the purpose of the Cape Town Convention the rights of the company’s aircraft lessors cannot be compromised against their will. 353

12.6  Cross-border issues

12.6.7 Receivership It is well established that a non-administrative receiver can be appointed over the assets of a foreign company. Their powers may be limited to those conferred upon them contractually by the security document, but these may well be sufficiently extensive, particularly if the assets concerned are situated in England where the courts should recognise the receiver’s authority. An administrative receiver can, however, only be appointed over the assets of a company registered under CA  2006 in England and Wales or Scotland (see the definition of ‘company’ in s 28(1) IA 1986). Both administrative and non-administrative receivership fall outside the scope of both the EU Insolvency Regulation and the CBIR.

354

Index [All references are to paragraph number]

Accounts liquidators, 3.7.2 receivers, 9.6.6 Acquisition of property secured creditors, 9.2.2 Administration administrators appointment, 4.3.1–4.3.6 conduct, 4.7.2 discharge, 4.11.9 duties, 4.7.1 identity, 4.3.2 misfeasance, 4.7.2.2 powers, 4.8 removal, 4.10.5 rule in ex parte James, 4.7.2.3 supervision, 4.10 administrator’s duties, 4.7.1 administrator’s powers bring proceedings to swell assets, 4.8.6 charged property, 4.8.3 consequence of agency, 4.8.8 continuing supply of utilities, 4.8.4 deal with hire purchased or charged property, 4.8.3 distributions and payments, 4.8.2 general powers, 4.8.1 hire purchase property, 4.8.3 investigations, 4.8.5 joint administrator, as, 4.8.7 summary list, 4.8.1 swelling of assets, 4.8.6 agency, 4.8.8 application to foreign companies, 12.6.2 approving administrator’s proposals, 4.6.5.1 Atlantic Computer guidelines, 4.4.3 bring proceedings to swell assets, 4.8.6 calling for a decision, 4.10.1 challenging administrator’s actions conduct, 4.7.2.1 misfeasance, 4.7.2.2 charged property, 4.8.3

Administration – contd continuing supply of utilities consent to termination of contract, 4.9.4.6 ‘contract for supply of goods and services’, 4.9.4.5 Excluded contracts, 4.9.4.7 guarantees, 4.9.4.3 introduction, 4.9.1 overview, 4.8.4 restrictions on termination due to administration, 4.9.4.4 payment of pre-administration debts, 4.9.4.1 restrictions on termination for past breaches, 4.9.4.2 s 233 IA 1986, 4.9.2 s 233A IA 1986, 4.9.3 s 233B IA 1986, 4.9.4 statutory provisions, 4.9.1 commencement appointment of administrator, 4.3.1 court appointment, 4.3.6 identity of administrator, 4.3.2 out of court appointment, 4.3.4–4.3.5 qualifying floating charge holder, 4.3.3 creditor notification initial creditors’ decision, 4.6.5 methods of communication, 4.6.1 notice of appointment, 4.6.2 progress report, 4.6.6 statement of affairs, 4.6.3 statement of proposals, 4.6.4 creditors’ committee, 4.10.2 deal with hire purchased or charged property, 4.8.3 decision-making processes, 4.6.5.3 directors, and effect, 6.7.1.2 introduction, 4.5.3 discharge of administrator, 4.11.9 dispensing with initial creditors’ decision, 4.6.5.7

355

Index Administration – contd distribution of proceeds administrator’s powers , 4.8.2 expenses, 2.4.4 generally, 2.1.3 set-off, 2.11.2 effect business of company, on, 4.5.4 contracts, on, 4.5.5 directors, on, 4.5.3 documentation, on, 4.5.6 insolvency proceedings, on, 4.4.1.1 other actions, on, 4.4.1.2 receiver, on, 4.5.2 status of company, on, 4.5.4 winding-up petition, on, 4.5.1 employees’ ongoing wages or salary, 10.3.4.1 ending administration administrator’s application to court, on, 4.11.5 automatically after one year, 4.11.2 creditor’s application to court, on, 4.11.7 creditors’ voluntary liquidation, on, 4.11.3 discharge of administrator, and, 4.11.9 dissolution of company, on, 4.11.4 overview, 4.11.1 public interest winding-up petition, following, 4.11.8 purpose of administration achieved, when, 4.11.6 expenses overview, 2.4.1 ranking, 2.4.4.1 relevant expenses, 2.4.4.2 super-priority, 2.4.4.3 foreign companies, 12.6.2 generally, 1.4.3 grant of permission, 4.4.3 hire purchase property, 4.8.3 initial creditors’ decision approving administrator’s proposals, 4.6.5.1 decision-making processes, 4.6.5.3 dispensing with, 4.6.5.7 giving notice to creditors, 4.6.5.2 need for physical meeting, 4.6.5.4 post-meeting procedure, 4.6.5.8 proxies, 4.6.5.6 rejection of proposals, and, 4.6.5.9 valuing claims, 4.6.5.5 voting, 4.6.5.5 interim moratorium, 4.4.1.3 introduction, 4.1

Administration – contd investigations, 4.8.5 joint administrator, 4.8.7 misfeasance, 4.7.2.2 moratorium effect on insolvency proceedings, 4.4.1.1 effect on other actions, 4.4.1.2 grant of permission, 4.4.3 interim moratorium, 4.4.1.3 purpose, 4.4.1 role of administrators, 4.4.2 notice to creditors, 4.6.5.2 notices, 4.6.2 notification of creditors initial creditors’ decision, 4.6.5 methods of communication, 4.6.1 notice of appointment, 4.6.2 progress report, 4.6.6 statement of affairs, 4.6.3 statement of proposals, 4.6.4 ongoing wages or salary, 10.3.4.1 partnerships, and, 1.5.2 physical meeting, 4.6.5.4 pre-packaged administrations advantages, 4.12.3 attitude of courts, 4.12.8 ‘connected person’, 4.12.6.2 creditor protection, 4.12.7 costs, 4.12.9 criticisms, 4.12.4 directors, and, 6.5.5.2 evaluators, 4.12.6.4 generally, 4.12.1 introduction, 1.4.4 involvement of proposed administrator, 4.12.2 meaning, 4.12.1 protection for creditors, 4.12.7 Regulations, 4.12.6 Statements of Insolvency Practice, 4.12.7 ‘substantial disposals’, 4.12.6.3 viability statements, 4.12.7.4 proceedings to swell assets, 4.8.6 process flowchart, 4.3.1 progress report, 4.6.6 proxies, 4.6.5.6 ‘purpose of administration’ corporate/business rescue, 4.2.2 meaning, 4.2.1 rejection of proposals, 4.6.5.7 role of administrators, 4.4.2 set-off, 2.11.4 statement of affairs, 4.6.3 statement of proposals, 4.6.4 super-priority, 2.4.4.3

356

Index Administration – contd supply of utilities consent to termination of contract, 4.9.4.6 ‘contract for supply of goods and services’, 4.9.4.5 Excluded contracts, 4.9.4.7 guarantees, 4.9.4.3 introduction, 4.9.1 overview, 4.8.4 restrictions on termination due to administration, 4.9.4.4 payment of pre-administration debts, 4.9.4.1 restrictions on termination for past breaches, 4.9.4.2 s 233 IA 1986, 4.9.2 s 233A IA 1986, 4.9.3 s 233B IA 1986, 4.9.4 statutory provisions, 4.9.1 swelling of assets, 4.8.6 tabular summary, 1.4.1 tenants, and arrears of rent, 10.2.3.1 disclaimer of lease, and, 10.2.3.4 forfeiture, 10.2.3.3 ongoing rent, 10.2.3.2 surrender of lease, and, 10.2.3.4 viability statements, 4.12.7.4 voting generally, 4.6.5.5 valuing claims, 4.6.5.5 Administrative receivers appointment advantages, 9.3.1 generally, 9.3.1.1 introduction, 9.3.1 City Exceptions generally, 9.3.2.2 introduction, 1.4.4 continuation of contracts to supply goods and services, 9.8.3.2 disposal of charged property, 9.8.3.1 duties, 9.7.3 employees’ ongoing wages or salary, 10.3.4.2 introduction, 1.4.4 investigations, 9.8.3.3 ongoing wages or salary, 10.3.4.2 powers, 9.8.3 Administrators appointment flowchart, 4.3.1 generally, 4.3.1 secured creditors, and, 9.3.1 challenge to actions conduct, 4.7.2.1 misfeasance, 4.7.2.2

Administrators – contd company voluntary arrangements, and, 8.2.5.1 conduct, 4.7.2.1 court appointments advantages, 4.3.1 applicants, 4.3.6.1 creditor’s application, 4.3.6.2 flowchart, 4.3.1 generally, 4.3.1 hearing, 4.3.6.5 inability to pay debts, 4.3.6.3 interim moratorium, 4.3.6.4 introduction, 4.3.6.6 notice requirements, 4.3.6.4 procedure, 4.3.6.3 qualifying floating charge holders, and, 4.3.6.6 discharge, 4.11.9 duties, 4.7.1 identity, 4.3.2 interim moratorium, 4.3.4.3 misfeasance, 4.7.2.2 out-of-court appointments accompanying documents, 4.3.4.5 advantages, 4.3.1 flowchart, 4.3.1 generally, 4.3.1 interim moratorium, 4.3.4.3 introduction, 4.3.4 notice, 4.3.4.4 notice of intention, 4.3.4.2 qualifying floating charge holders, by, 4.3.5 restrictions on power to appoint, 4.3.4.1 out-of-court appointments by QFCHs generally, 4.3.5 notice, 4.3.5.3 notice of intention, 4.3.5.2 out of hours, 4.3.5.4 restrictions on power to appoint, 4.3.5.1 powers charged property, 4.8.3 consequence of agency, 4.8.8 continuing supply of utilities, 4.8.4 deal with hire purchased or charged property, 4.8.3 distributions and payments, 4.8.2 general powers, 4.8.1 hire purchase property, 4.8.3 investigations, 4.8.5 joint administrator, as, 4.8.7 summary list, 4.8.1 qualified floating charge holders appointment by court, 4.3.6.6 generally, 4.3.3 out-of-court appointments, 4.3.5

357

Index Administrators – contd removal, 4.10.5 remuneration, 4.10.3 rule in ex parte James, 4.7.2.3 secured creditors, and advantages, 9.3.1 generally, 9.3.1.3 introduction, 9.3.1 supervision calling for a decision, 4.10.1 creditors’ committee, 4.10.2 determining remuneration, 4.10.3 removal of administrator, 4.10.5 role of court, 4.10.4 Agency administrators, 4.8.8 liquidators, 3.8.6 Agents receivers, 9.4.1 Antecedent transactions available actions, 5.1.2 ‘connected’ person, 5.8 distributions post-presentation of winding-up petition court ‘order otherwise’, 5.7.3 disposition of the company’s property, 5.7.2 generally, 5.7.1 meaning, 5.7.1 payments into account in credit, 5.7.4.1 payments into overdrawn account, 5.7.4.2 payments out of account in credit, 5.7.4.3 payments out of overdrawn account, 5.7.4.4 payments passing through company’s bank account, 5.7.4 persons benefitting from proceeds of action, 5.7.5 extortionate credit transactions court orders available, 5.5.2 meaning, 5.5.1 floating charges for no new value meaning, 5.6.1 ‘new value’, 5.6.2 summary, 5.6.1 ‘hardening periods’, 5.1.2 ‘onset of insolvency’, 5.1.3 overview, 5.1.1 preferences beneficiaries of proceeds of action, 5.3.7 court orders available, 5.3.6 examples, 5.3.4 generally, 5.3.1 ‘influenced by a desire’, 5.3.3

Antecedent transactions – contd preferences – contd insolvent liquidation, 5.3.2 meaning, 5.3.1 secured creditors, and, 5.3.5 summary, 5.3.1 transactions at an undervalue court orders available, 5.2.6 defences, 5.2.3 determination of ‘value’, 5.2.2 examples, 5.2.4 meaning, 5.2.1 persons benefitting from proceeds of action, 5.2.7 secured creditors, and, 5.2.5 summary, 5.2.1 ‘value’, 5.2.2 transactions defrauding creditors court orders available, 5.4.4 elements, 5.4.2 ‘for purpose of putting assets beyond reach of creditors’ mean’, 5.4.3 generally, 5.4.1 meaning, 5.4.1 summary, 5.4.1 Appointment of receivers accounts, 9.6.6 administrative receiver’s report, 9.6.4 advantages, 9.3.1 agent, as, 9.4.1 available options, 9.3.1 City Exceptions generally, 9.3.2.2 introduction, 1.4.4 consequences directors, on, 9.5.2 documentation, on, 9.5.4 existing contracts, on, 9.5.3 other insolvency proceedings, on, 9.5.1 contracts, and entry into contracts, 9.4.2 existing contracts, 9.5.3 court, by, 9.3.1.4 creditors’ committees, 9.6.5 demand on company, 9.3.3.2 directors, and, 9.5.2 documentation, and, 9.5.4 effect directors, on, 9.5.2 documentation, on, 9.5.4 existing contracts, on, 9.5.3 other insolvency proceedings, on, 9.5.1 effect of invalid appointment, 9.3.4 effect of liquidation, 9.4.3 existing contracts, and, 9.5.3 fixed or floating charge assets, over, 9.3.1.2 indemnity, 9.4.2

358

Index Appointment of receivers – contd limitations, 9.3.2.1 liquidation, and, 9.5.1 ‘mechanics of payment’ test, 9.3.3.2 notices, 9.6.2 notification to creditors administrative receiver’s report, 9.6.6 creditors’ committee, 9.6.5 generally, 9.6.2 overview, 9.6.1 receivership accounts, 9.6.6 statement of affairs, 9.6.3 other insolvency proceedings, and, 9.5.1 overview, 9.2.1.5 procedure demand on company, 9.3.3.2 generally, 9.3.3.3 relevant circumstances, 9.3.3.1 ‘project company’, 9.3.2.2 receiver’s report, 9.6.4 receivership accounts, 9.6.6 statement of affairs, 9.6.3 status of receiver, 9.4 ‘step-in rights’, 9.3.2.2 Arrears of rent tenant in administration, 10.2.3.1 tenant in liquidation, 10.2.4.1 Assets balance sheet test, 1.3.4 Balance sheet test inability to pay debts, 1.3.4 Banker’s set-off And see Set-off generally, 2.11.2 Board meetings voluntary liquidations, 3.3.1 Book debts fixed charges, 2.3.8 Business of the company consequences of administration, 4.5.4 consequences of liquidation, 3.5.1 Business plan restructuring, 11.5.1 Business rates tenants in administration, 10.2.3.4 Carrying on business of company receiver’s duties, 9.7.2.3 Cash deposits fixed charges, 2.3.8 Cash-flow restructuring drawdown on existing facilities, 11.4.6.1 introduction, 11.4.6 management, 11.4.6.3 new money, 11.4.6.2

Cash-flow test inability to pay debts, 1.3.3 Centre of main interests (COMI) And see Cross-border issues ascertaining, 12.2.4.1 change, 12.2.4.3 rebuttal of presumption, 12.2.4.2 Charged property administrative receivers, 9.8.3.1 administrators’ powers, 4.8.3 Charges security interests, 2.3.1 City Exceptions And see Administrative receivership generally, 9.3.2.2 introduction, 1.4.4 Clearance procedure restructuring, and, 11.8.4 Co-debtors company voluntary arrangements, 8.2.5.3 Common law cross-border issues, 12.5 sources of insolvency law, 1.2.8 Companies Act 2006 sources of insolvency law, 1.2.2 Company property distribution of proceeds of liquidation, 2.2.1 Company voluntary arrangement (CVAs) administrators’ proposals, 8.2.2.3 application to foreign companies, 12.6.4 approval effect on co-debtor, 8.2.5.3 effect on formal insolvency process, 8.2.5.2 effect on guarantor, 8.2.5.3 persons bound, 8.2.5.1 supply contracts, 8.2.5.4 challenges jurisdictional, 8.2.6.4 material irregularity, 8.2.6.3 mechanism, 8.2.6.1 unfair prejudice, 8.2.6.2 co-debtors, and, 8.2.5.3 commencement creditors’ decision, 8.2.2.4 flowchart, 8.2.2 proposal by administrators, 8.2.2.3 proposal by directors, 8.2.2.2 proposal by liquidators, 8.2.2.3 proposers, 8.2.2.1 summoning the members’ meetings, 8.2.2.5 contracts for supply of goods and services, 8.2.5.4 creditors’ decision, 8.2.2.4

359

Index Company voluntary arrangement (CVAs) – contd creditors’ meetings effect of different decision by creditors, 8.2.4.6 functions, 8.2.4.1 preferential creditors, and, 8.2.4.5 proxies, 8.2.4.3 report of outcome, 8.2.4.7 secured creditors, and, 8.2.4.5 summoning, 8.2.2.5 valuing claims, 8.2.4.2 voting, 8.2.4.2, 8.2.4.4 directors, and, 6.7.1.4 directors’ proposals, 8.2.2.2 distribution of proceeds, 2.1.3 foreign companies, 12.6.4 generally, 1.4.6 goods and services, 8.2.5.4 guarantors, and, 8.2.5.3 implementation, 8.2.7 introduction, 8.1 jurisdictional challenges, 8.2.6.4 landlord creditors, and, 10.2.5 liquidators’ proposals, 8.2.2.3 material irregularity, 8.2.6.3 overview, 8.2.1 preferential creditors, and, 8.2.4.5 proposals administrators, by, 8.2.2.3 content, 8.2.3 directors, by, 8.2.2.2 liquidators, by, 8.2.2.3 proposers, 8.2.2.1 proxies, 8.2.4.3 report of outcome of meeting, 8.2.4.7 restructuring, and, 11.6.2.2 secured creditors, and, 8.2.4.5 seeking the creditors’ decision, 8.2.2.4 set-off, 2.11.5 shareholders’ meetings effect of different decision by creditors, 8.2.4.6 functions, 8.2.4.1 preferential creditors, and, 8.2.4.5 report of outcome, 8.2.4.7 secured creditors, and, 8.2.4.5 summoning, 8.2.2.5 valuing claims, 8.2.4.2 voting, 8.2.4.2, 8.2.4.4 summoning the members’ meetings, 8.2.2.5 supply of goods and services, 8.2.5.4 tabular summary, 1.4.1 unfair prejudice, 8.2.6.2 utility supplies, 8.2.5.4 valuing claims, 8.2.4.2

Company voluntary arrangement (CVAs) – contd voting at meetings generally, 8.2.4.4 valuing claims, 8.2.4.2 Compensation orders disqualification of directors, 6.4.7.3 Compulsory liquidation commencement creditors, by, 3.4.3 jurisdiction of court, 3.4.1 petitioners, 3.4.2 petitions, 3.4.4 process flowchart, 3.4.1 provisional liquidation, 3.4.5 creditors, by introduction, 3.4.3 restraint of winding-up petition, 3.4.3.2 statutory demands, 3.4.3.1 temporary restrictions applying, 3.4.3.3 creditors’ voluntary liquidation, and, 3.2.3 decision making by creditors, 3.9.2.2 generally, 1.4.2 involvement of and information to creditors decision making by creditors, 3.9.2.2 liquidation committee, 3.9.2.1 opting out, 3.9.2.4 progress reports, 3.9.2.3 remuneration of liquidator, 3.9.2.5 jurisdiction of court, 3.4.1 liquidation committee, 3.9.2.1 liquidators change by creditors, 3.4.6.2 Official Receiver, 3.4.6.1 remuneration, 3.9.2.5 petitioners, 3.4.2 petitions court hearing, 3.4.4.4 notices, 3.4.4.2 presentation, 3.4.4.1 withdrawal, 3.4.4.3 progress reports, 3.9.2.3 proving for debts debts not provable, 3.10.3 generally, 3.10.1 provable debts, 3.10.2 quantification of claims, 3.10.6 secured creditors, 3.10.4 treatment by liquidator, 3.10.5 provisional liquidation, 3.4.5 remuneration of liquidator, 3.9.2.5 restraint of winding-up petition, 3.4.3.2 special manager’s role, 3.4.7 statutory demands, 3.4.3.1 tabular summary, 1.4.1 temporary restrictions applying, 3.4.3.3 use, 3.2.3

360

Index Conflict of interests liquidators, 3.7.3 ‘Connected’ person antecedent transactions, 5.8 pre-packaged administrations, 4.12.6.2 Consultation termination of employment, 10.3.2.3 Contingent debts members’ voluntary liquidation, 3.12.1 Contingent liability balance sheet test, 1.3.4 Continuation of supply of goods and services administrative receivers, and, 9.8.3.2 administrators, and, 4.8.4 company voluntary arrangements, and, 8.2.5.4 consent to termination of contract, 4.9.4.6 ‘contract for supply of goods and services’, 4.9.4.5 excluded contracts, 4.9.4.7 guarantees, 4.9.4.3 introduction, 4.9.1 liquidators, and, 3.8.2 overview, 4.8.4 restrictions on termination due to administration, 4.9.4.4 payment of pre-administration debts, 4.9.4.1 restrictions on termination for past breaches, 4.9.4.2 restructuring plans, and, 8.3.1.10 s 233 IA 1986, 4.9.2 s 233A IA 1986, 4.9.3 s 233B IA 1986, 4.9.4 schemes of arrangement, and, 8.3.1.10 statutory provisions, 4.9.1 Contracts consequences of administration, 4.5.5 consequences of liquidation, 3.5.5 consequences of receivership entry into contracts, 9.4.2 existing contracts, 9.5.3 Contracts for supply of goods and services administrative receivers, and, 9.8.3.2 administrators, and, 4.8.4 company voluntary arrangements, and, 8.2.5.4 consent to termination of contract, 4.9.4.6 ‘contract for supply of goods and services’, 4.9.4.5 excluded contracts, 4.9.4.7 guarantees, 4.9.4.3 introduction, 4.9.1 liquidators, and, 3.8.2 overview, 4.8.4

Contracts for supply of goods and services – contd restrictions on termination due to administration, 4.9.4.4 payment of pre-administration debts, 4.9.4.1 restrictions on termination for past breaches, 4.9.4.2 restructuring plans, and, 8.3.1.10 s 233 IA 1986, 4.9.2 s 233A IA 1986, 4.9.3 s 233B IA 1986, 4.9.4 schemes of arrangement, and, 8.3.1.10 statutory provisions, 4.9.1 Contracts of employment consequences of liquidation, 3.5.5 Contractual set-off And see Set-off generally, 2.11.2 Contribution notices restructuring, 11.8.2.2 Conversion creditors’ voluntary liquidation, 3.3.4 members’ voluntary liquidation, 3.3.2.2 Costs and expenses of process administration overview, 2.4.1 ranking, 2.4.4.1 relevant expenses, 2.4.4.2 super-priority, 2.4.4.3 liquidation litigation expenses, 2.4.3.3 overview, 2.4.1 ranking, 2.4.3.1 relevant expenses, 2.4.3.2 moratorium debts benefit to moratorium creditors, 2.4.2.3 benefit to Official Receiver, 2.4.2.2 overview, 2.4.1 pre-moratorium debts, 2.4.2.3 priority status, 2.4.2.1 receivership overview, 2.4.1 ranking, 2.4.5.1 relevant expenses, 2.4.5.2 Council Insolvency Regulation (EU/1346/2000) And see Cross-border issues applicable proceedings, 12.2.2 application to UK after Brexit, 12.2.1 centre of main interests ascertaining, 12.2.4.1 change, 12.2.4.3 rebuttal of presumption, 12.2.4.2 establishment, 12.2.5 generally, 12.2.1 introduction, 12.1

361

Index Council Insolvency Regulation (EU/1346/2000) – contd jurisdiction to open proceedings, 12.2.3 rebuttal of registered office presumption, 12.2.3.2 relevant proceedings, 12.2.2 sources of insolvency law, 1.2.3 ‘Credit bid’ secured creditors, and, 9.2.2 Creditors’ committee receivership, and, 9.6.5 supervision of administrators, and, 4.10.2 Creditors’ meetings company voluntary arrangements, and effect of different decision by creditors, 8.2.4.6 functions, 8.2.4.1 preferential creditors, and, 8.2.4.5 proxies, 8.2.4.3 report of outcome, 8.2.4.7 secured creditors, and, 8.2.4.5 summoning, 8.2.2.5 valuing claims, 8.2.4.2 voting, 8.2.4.2, 8.2.4.4 creditors’ voluntary liquidation, and generally, 3.3.3.5 introduction, 3.3.3.1 voting, 3.3.3.6 receivership, and, 9.6.5 Creditors’ voluntary liquidation commencement additional requirements, 3.3.3 common initial steps, 3.3.1 conversion to compulsory liquidation, 3.3.4 process flowchart, 3.3.1 compulsory liquidation, and, 3.2.3 conversion, 3.3.4 creditors’ decisions decision-making processes, 3.3.3.4 deemed consent procedure, 3.3.3.4 different liquidators appointed by creditors and members, 3.3.3.8 interlude between meeting and decision, 3.3.3.9 nomination of liquidator, 3.3.3.1 notice to creditors, 3.3.3.2–3.3.3.3 proxies, 3.3.3.7 valuing claims, 3.3.3.6 virtual meeting, 3.3.3.4 voting, 3.3.3.6 creditors’ meetings generally, 3.3.3.5 introduction, 3.3.3.1 voting, 3.3.3.6 decision making by creditors, 3.9.2.2 decision-making processes, 3.3.3.4

Creditors’ voluntary liquidation – contd deemed consent procedure, 3.3.3.4 generally, 1.4.2 involvement of and information to creditors decision making by creditors, 3.9.2.2 liquidation committee, 3.9.2.1 opting out, 3.9.2.4 progress reports, 3.9.2.3 remuneration of liquidator, 3.9.2.5 liquidation committee, 3.9.2.1 members’ voluntary liquidation, and, 3.2.2 nomination of liquidator generally, 3.3.3.1 notice to creditors, 3.3.3.2–3.3.3.3 notice to creditors delivery by email, 3.3.3.3 generally, 3.3.3.2 process flowchart, 3.3.1 progress reports, 3.9.2.3 proving for debts debts not provable, 3.10.3 generally, 3.10.1 provable debts, 3.10.2 quantification of claims, 3.10.6 secured creditors, 3.10.4 treatment by liquidator, 3.10.5 proxies, 3.3.3.7 remuneration of liquidator, 3.9.2.5 tabular summary, 1.4.1 use, 3.2.2 valuing claims, 3.3.3.6 virtual meeting generally, 3.3.3.4 introduction, 3.3.3.1 voting, 3.3.3.6 Criminal liability directors, and, 6.4.8 Cross-border issues application of formal processes to foreign companies administration, 12.6.2 company voluntary arrangements, 12.6.4 liquidation, 12.6.1 Part A1 Moratorium, 12.6.3 receivership, 12.6.7 restructuring plans, 12.6.6 schemes of arrangement, 12.6.5 common law, 12.5 Cross-Border Insolvency Regulations 2006 application, 12.3.2 available relief, 12.3.4 co-operation and co-ordination, 12.3.6 future changes, 12.3.7

362

Index Cross-border issues – contd Cross-Border Insolvency Regulations 2006 – contd recognition of foreign proceedings, 12.3.3 rights of access, 12.3.5 UNCITRAL Model Law, 12.3.1 EU Insolvency Regulation applicable proceedings, 12.2.2 application to UK after Brexit, 12.2.1 centre of main interests, 12.2.4.1– 12.2.4.3 establishment, 12.2.5 generally, 12.2.1 introduction, 12.1 jurisdiction to open proceedings, 12.2.3 rebuttal of registered office presumption, 12.2.3.2 relevant proceedings, 12.2.2 sources of insolvency law, 1.2.3 Insolvency Act 1986, section 426 assistance by English courts, 12.4.2 functions, 12.4.1 introduction, 12.1 UNCITRAL Model Law, 12.3.1 Customer deposits directors, and, 6.5.4 De facto directors And see Directors generally, 6.2.2 De jure directors And see Directors generally, 6.2.1 Debt reduction restructuring, and, 11.6.1.3 Debt to equity swap flowchart, 11.7.2.1 generally, 11.7.1 Debts due to members distribution of proceeds of liquidation, and, 2.10 Directors administration, and effect, 6.7.1.2 introduction, 4.5.3 appointment of receivers, and, 9.5.2 breach of duty, 6.4.4 claims by HMRC, 6.4.6 company voluntary arrangements, and effect on powers, 6.7.1.4 proposals, 8.2.2.1 compensation orders, 6.4.7.3 consequences of administration, and, 4.5.3 criminal liability, 6.4.8 customer deposits, 6.5.4 de facto directors, 6.2.2

Directors – contd de jure directors, 6.2.1 disqualification orders alternatives, 6.4.7.6 compensation, 6.4.7.3 factors to be considered, 6.4.7.5 generally, 6.4.7.1 permission to act, 6.4.7.7 role of insolvency officeholder, 6.4.7.4 scope of order, 6.4.7.2 disqualification undertakings, 6.4.7.6 duties formal insolvency process, in, 6.7.2 general duties, 6.3.1 groups of companies, 6.3.4 persons to whom duties owed, 6.3.2 ratification, 6.3.3 fraudulent trading ‘dishonest’, 6.4.3.2 introduction, 6.4.3.1 risks, 6.4.3.1 HMRC claims, 6.4.6 indemnities, 6.5.6 insurance, 6.5.6 introduction, 6.1 liquidation, and effect, 6.7.1.1 introduction, 3.5.1 misfeasance, 6.4.4 non-executive directors, and, 6.2.4 practical consequences customer deposits, 6.5.4 general role, 6.5.2 indemnities, 6.5.6 insurance, 6.5.6 overview, 6.5.1 pre-packaged sales, 6.5.5.2 public companies, and, 6.6 resignation of director, 6.5.3 trading beyond critical date, 6.5.5 pre-packaged sales, 6.5.5.2 receivership, and, 6.7.1.3 resignation, 6.5.3 re-use of company names exceptions, 6.4.5.3 generally, 6.4.5.1 ‘prohibited name’, 6.4.5.2 risks breach of duty, 6.4.4 claims by HMRC, 6.4.6 criminal liability, 6.4.8 disqualification, 6.4.7 fraudulent trading, 6.4.3 misfeasance, 6.4.4 overview, 6.4.1 re-use of company names, 6.4.5 wrongful trading, 6.4.2

363

Index Directors – contd role in formal insolvency process directors’ duties, 6.7.2 directors’ powers, 6.7.1 statement of affairs, 6.7.3 serious loss of capital, 6.6.1 shadow directors, 6.2.3 statement of affairs administration, 6.7.3.2 administrative receivership, 6.7.3.3 introduction, 6.7.3 liquidation, 6.7.3.1 stock exchange announcements, 6.6.2 trading beyond critical date, 6.5.5 types de facto, 6.2.2 de jure, 6.2.1 non-executive, 6.2.4 shadow, 6.2.3 wrongful trading defences, 6.4.2.3 extent of liability, 6.4.2.4 generally, 6.4.2.1 standards expected of director, 6.4.2.2 Directors’ conduct liquidators, and, 3.7.2 Discharge of administrator generally, 4.11.9 Discharge of liabilities liquidators, and, 3.7.2 Disclaimer of onerous property circumstances in which notice may not be given, 3.6.3 effect, 3.6.2 exercise of power, 3.6.1 ‘property’, 3.6.1.2 remedy for parties affected, 3.6.4 tenant in liquidation, and, 10.2.3.4 ‘unprofitable contract’, 3.6.1.1 Disqualification orders And see Directors alternatives, 6.4.7.6 compensation payments, 6.4.7.3 factors to be considered, 6.4.7.5 generally, 6.4.7.1 permission to act, 6.4.7.7 role of insolvency officeholder, 6.4.7.4 scope of order, 6.4.7.2 Disqualification undertakings And see Directors generally, 6.4.7.6 Dissolution of company termination of administration, and, 4.11.4 termination of liquidation, and, 3.13.2 Distribution administration And see Administration generally, 1.4.3

Distribution of proceeds administration administrators’ powers, and, 4.8.2 expenses, 2.4.4 generally, 2.1.3 set-off, 2.11.4 company voluntary arrangements generally, 2.1.3 set-off, 2.11.5 liquidation And see below available property, 2.2.1 costs and expenses of process, 2.4.1– 2.4.4 debts due to members, 2.10 interest, 2.8 introduction, 2.1.1 non-provable debts, 2.9 preferential debts, 2.5 prescribed part, 2.6.1–2.6.3 secured creditors, 2.3.1–2.3.8 set-off, 2.11.1–2.11.4 unsecured creditors, 2.7.1–2.7.3 ‘property’, 2.2.1 receivership expenses, 2.4.5 generally, 2.1.3 Distribution of proceeds of liquidation available property, 2.2.1 company property, 2.2.1 costs and expenses of process litigation expenses, 2.4.3.3 overview, 2.4.1 ranking, 2.4.3.1 relevant expenses, 2.4.3.2 debts due to members, 2.10 dividend for creditors final dividend, 3.11.2 generally, 3.11.1 members’ voluntary liquidation, in, 3.11.3 interest, 2.8 introduction, 2.1.1 litigation expenses, 2.4.3.3 liquidation expenses litigation expenses, 2.4.3.3 overview, 2.4.1 ranking, 2.4.3.1 relevant expenses, 2.4.3.2 non-provable debts, 2.9 order of payment of creditors available property, 2.2.1 costs and expenses of process, 2.4.1– 2.4.4 debts due to members, 2.10 interest, 2.8 introduction, 2.1.1

364

Index Distribution of proceeds of liquidation – contd order of payment of creditors – contd non-provable debts, 2.9 preferential debts, 2.5 prescribed part, 2.6.1–2.6.3 secured creditors, 2.3.1–2.3.8 set-off, 2.11.1–2.11.5 unsecured creditors, 2.7.1–2.7.3 preferential debts, 2.5 prescribed part amount, 2.6.2 charges created before 15 September 2003, 2.6.3 meaning, 2.6.1 setting aside, and, 2.6.3 proceeds of officeholders’ actions, 2.2.2 ‘property’, 2.2.1 secured creditors And see Secured creditors ‘commercial’ security, 2.3.3 crystallisation, 2.3.6 fixed charges, 2.3.4–2.3.8 floating charges, 2.3.4–2.3.7 generally, 2.3 introduction, 2.1.2 ‘security interest’, 2.3.1 validity of security, 2.3.2 set-off administration, in, 2.11.4 company voluntary arrangements, and, 2.11.5 liquidation, in, 2.11.3 relevance, 2.11.1 security, and, 2.3.3 types, 2.11.2 unsecured creditors acceleration of debts, 2.7.1 anti-deprivation principle, 2.7.3.1 effect of liquidation, 2.7.1 pari passu principle, 2.7.3.2–2.7.3.3 setting aside arrangements, 2.7.3 Distributions post-presentation of winding-up petition And see Antecedent transactions court ‘order otherwise’, 5.7.3 disposition of the company’s property, 5.7.2 generally, 5.7.1 meaning, 5.7.1 payments into account in credit, 5.7.4.1 payments into overdrawn account, 5.7.4.2 payments out of account in credit, 5.7.4.3 payments out of overdrawn account, 5.7.4.4 payments passing through company’s bank account, 5.7.4 persons benefitting from proceeds of action, 5.7.5

Dividend for creditors final dividend, 3.11.2 generally, 3.11.1 members’ voluntary liquidation, in, 3.11.3 Documentation appointment of receivers, and, 9.5.4 consequences of administration, and, 4.5.6 consequences of liquidation, and, 3.5.6 Drawdown on existing facilities restructuring, and, 11.4.6.1 Due diligence restructuring, and, 11.5.1 Employees duty to consult on termination, 10.3.2.3 ongoing wages or salary administration, 10.3.4.1 administrative receivership, 10.3.4.2 overview, 10.3.1 restrictive covenants, 10.3.2.6 statutory redundancy pay, 10.3.2.2 termination of employment administration moratorium, and, 10.3.2.4 breach of duty to consult, 10.3.2.3 claims, 10.3.2.2 duty to inform BIS, 10.3.2.5 effective date, 10.3.2.1 release from restrictive covenants, 10.3.2.6 transfer of undertakings general rules, 10.3.5.1 specific exceptions, 10.3.5.2 unfair dismissal, 10.3.2.2 unpaid remuneration interaction between claims, 10.3.3.3 other considerations, 10.3.3.5 preferential debts, 10.3.3.1 recoverable sums, 10.3.3.2 ‘remuneration’, 10.3.3.1 status of claims, 10.3.3.4 wrongful dismissal, 10.3.2.2 Employment contracts consequences of liquidation, and, 3.5.5 Enforcement of security acquisition of secured property, 9.2.2 appointment of receiver advantages, 9.3.1 available options, 9.3.1 City Exceptions, 9.3.2.2 duties of receivers, 9.7 effect of invalid appointment, 9.3.4 limitations, 9.3.2.1 notification to creditors, 9.6 other consequences, 9.5 overview, 9.2.1.5

365

Index Enforcement of security – contd appointment of receiver – contd powers of receiver, 9.8 procedure, 9.3.3 status of receiver, 9.4 termination, 9.9 available remedies, 9.2.1 foreclosure, 9.2.1.4 overview, 9.2.1.1 possession of secured property, 9.2.1.2 purchase of secured property, 9.2.2 sale of secured property, 9.2.1.3 Equitable set-off And see Set-off generally, 2.11.2 EU Insolvency Regulation (1346/2000) And see Cross-border issues applicable proceedings, 12.2.2 application to UK after Brexit, 12.2.1 centre of main interests ascertaining, 12.2.3.1 change, 12.2.4.3 rebuttal of presumption, 12.2.3.2 establishment, 12.2.5 generally, 12.2.1 introduction, 12.1 jurisdiction to open proceedings, 12.2.3 rebuttal of registered office presumption, 12.2.3.2 relevant proceedings, 12.2.2 sources of insolvency law, 1.2.3 Existing contracts appointment of receivers, and, 9.5.3 Expenses of process administration overview, 2.4.1 ranking, 2.4.4.1 relevant expenses, 2.4.4.2 super-priority, 2.4.4.3 liquidation, and litigation expenses, 2.4.3.3 overview, 2.4.1 ranking, 2.4.3.1 relevant expenses, 2.4.3.2 receivership overview, 2.4.1 ranking, 2.4.5.1 relevant expenses, 2.4.5.2 Extortionate credit transactions And see Antecedent transactions court orders available, 5.5.2 meaning, 5.5.1 Factoring security, and, 2.3.3

Final account compulsory liquidation, 3.13.1.2 voluntary liquidation, 3.13.1.1 Financial advisers restructuring, and, 11.4.4 Financial creditors restructuring, and holding debt, 11.3.2.3 intervention by court, 11.3.2.5 relevant debt, 11.3.2.1 rights of creditors, 11.3.2.4 value breaks, 11.3.2.2 Final dividend distribution of proceeds of liquidation, and, 3.11.2 Financial Collateral Arrangements (No 2) Regulations 2003 advantages, 9.10.2 application, 9.10.1 avoidance provisions, 9.10.2.2 creation of security, 9.10.2.3 enforcement, 9.10.2.1 perfection of security, 9.10.2.3 Financial difficulties restructuring plans, and, 8.3.1.4 Financial support directions restructuring, and, 11.8.2.1 Fixed charge receiver generally, 1.4.4 Fixed charges classes of asset, 2.3.8 generally, 2.3.4 importance of distinction, 2.3.7 meaning, 2.3.4 Flawed assets security, and, 2.3.3 Floating charges advantages, 2.3.5 antecedent transactions, and meaning, 5.6.1 ‘new value’, 5.6.2 summary, 5.6.1 crystallisation, 2.3.6 generally, 2.3.4 importance of distinction, 2.3.7 meaning, 2.3.4 Floating charges for no new value And see Antecedent transactions meaning, 5.6.1 ‘new value’, 5.6.2 summary, 5.6.1 Foreclosure secured creditors, 9.2.1.4 Foreign companies And see Cross-border issues application of formal processes administration, 12.6.2

366

Index Foreign companies – contd application of formal processes – contd company voluntary arrangements, 12.6.4 liquidation, 12.6.1 Part A1 Moratorium, 12.6.3 receivership, 12.6.7 restructuring plans, 12.6.6 schemes of arrangement, 12.6.5 schemes of arrangement English courts having jurisdiction, 12.6.5.1 recognition in foreign jurisdictions, 12.6.5.2 Forfeiture tenant in administration, 10.2.3.3 tenant in liquidation, 10.2.4.3 Formal process generally, 1.4.1 tabular summary, 1.4.1 Fraudulent trading ‘dishonest’, 6.4.3.2 introduction, 6.4.3.1 risks, 6.4.3.1 Free assets secured creditors, and, 2.1.2 Getting in company’s property liquidators, 3.8.3.1 Good faith receiver’s duties, 9.7.2.1 Goods and services administrative receivers, and, 9.8.3.2 administrators, and, 4.8.4 company voluntary arrangements, and, 8.2.5.4 consent to termination of contract, 4.9.4.6 ‘contract for supply of goods and services’, 4.9.4.5 excluded contracts, 4.9.4.7 guarantees, 4.9.4.3 introduction, 4.9.1 liquidators, and, 3.8.2 overview, 4.8.4 restrictions on termination due to administration, 4.9.4.4 payment of pre-administration debts, 4.9.4.1 restrictions on termination for past breaches, 4.9.4.2 restructuring plans, and, 8.3.1.10 s 233 IA 1986, 4.9.2 s 233A IA 1986, 4.9.3 s 233B IA 1986, 4.9.4 schemes of arrangement, and, 8.3.1.10 statutory provisions, 4.9.1

Guarantees restructuring plans, and, 8.3.1.5 Guarantors company voluntary arrangements, 8.2.5.3 ‘Hardening periods’ antecedent transactions, 5.1.2 HMRC claims against directors, 6.4.6 Hire purchase property administrators’ powers, 4.8.3 Impartiality liquidators, 3.7.3 Inability to pay debts balance sheet test, 1.3.4 cash-flow test, 1.3.3 contingent liability, 1.3.4 generally, 1.3.1 implications, 1.3.5 meaning, 1.3.1 need for different tests, 1.3.2 prospective liability, 1.3.4 Indemnities directors, 6.5.6 receivers, 9.4.2 Independent reporting accountants restructuring, 11.5.2 Initial creditors’ decision approving administrator’s proposals, 4.6.5.1 decision-making processes, 4.6.5.3 dispensing with, 4.6.5.7 giving notice to creditors, 4.6.5.2 need for physical meeting, 4.6.5.4 post-meeting procedure, 4.6.5.8 proxies, 4.6.5.6 rejection of proposals, and, 4.6.5.9 valuing claims, 4.6.5.5 voting, 4.6.5.5 Inquiry into company dealings liquidators, 3.8.3.2 INSOL principles restructuring, 11.4.1–11.4.2 Insolvency alternative process, 1.6 distribution of proceeds, 2.1–2.11 formal processes, 1.4 inability to pay debts, 1.3 insolvent entities, 1.5 meaning, 1.1.1 processes, 1.4 sources of law, 1.2 Insolvency Act 1986 cross-border issues, and And see Cross-border issues assistance by English courts, 12.4.2

367

Index Insolvency Act 1986 – contd cross-border issues, and – contd functions, 12.4.1 introduction, 12.1 sources of insolvency law, 1.2.1 Insolvency law common law, 1.2.8 Companies Act 2006, 1.2.2 EU Insolvency Regulation, 1.2.3 Insolvency Act 1986, 1.2.1 Insolvency Rules 2016, 1.2.5 practice directions and statements, 1.2.7 primary legislation, 1.2.4 retained EU Insolvency Regulation, 1.2.3 secondary legislation, 1.2.6 Statements of Insolvency Practice, 1.2.9 Insolvency officeholder retention of title creditors, and, 10.5.4 Insolvency proceedings consequences of administration, and, 4.4.1.1 Insolvency Rules 1986 sources of insolvency law, 1.2.1 Insolvency set-off And see Set-off generally, 2.11.2 Insolvent entities limited liability partnerships, 1.5.3 limited partnerships, 1.5.2 overview, 1.5.1 partnerships, 1.5.2 unregistered companies, 1.5.4 Insurance directors, and, 6.5.6 Interest distribution of proceeds of liquidation, and, 2.8 Interim moratorium administration, and, 4.4.1.3 Investigation of affairs liquidators, and, 3.7.2 Investigative powers administrative receivers, and, 9.8.3.3 administrators, and, 4.8.5 liquidators, and, 3.8.3 Joint administrators And see Administrators generally, 4.8.7 Joint liabilities restructuring plans, and, 8.3.1.5 Joint liquidators And see Liquidators generally, 3.8.5 Jurisdiction company voluntary arrangements, and, 8.2.6.4 compulsory liquidation, and, 3.4.1

Landlords available remedies, 10.2.1 business rates, 10.2.3.4 company voluntary arrangements, 10.2.5 introduction, 10.1 overview, 10.2.1 Part 1A Moratorium, 10.2.7 rent deposits, 10.2.8.1 repayment from other sources effect on guarantors, 10.2.8.3 general rule, 10.2.8 rent deposits, 10.2.8.1 sub-tenants, 10.2.8.2 restructuring plans, 10.2.6 tenant in administration arrears of rent, 10.2.3.1 disclaimer of lease, and, 10.2.3.4 forfeiture, 10.2.3.3 ongoing rent, 10.2.3.2 surrender of lease, and, 10.2.3.4 tenant in liquidation arrears of rent, 10.2.4.1 disclaimer of lease, and, 10.2.4.4 forfeiture, 10.2.4.3 ongoing rent, 10.2.4.2 surrender of lease, and, 10.2.4.4 tenant in receivership, 10.2.2 Legal proceedings consequences of liquidation, and, 3.5.4 Legal set-off And see Set-off generally, 2.11.2 Liabilities balance sheet test, and, 6 Liens security interests, and, 2.3.1 Limited liability partnerships generally, 1.5.3 introduction, 1.5.1 Limited partnerships generally, 1.5.2 introduction, 1.5.1 Liquidation application to foreign companies, 12.6.1 appointment of receivers, and, 9.5.1 compulsory liquidation And see Compulsory liquidation commencement, 3.4 generally, 1.4.2 tabular summary, 1.4.1 use, 3.2.3 consequences business of the company, on, 3.5.2 contracts, on, 3.5.5 directors, on, 3.5.1 documentation, on, 3.5.6 employment contracts, on, 3.5.5

368

Index Liquidation – contd consequences – contd legal proceedings, on, 3.5.4 share transfers, on, 3.5.3 status of the company, on, 3.5.2 creditors’ voluntary liquidation And see Creditors’ voluntary liquidation commencement, 3.3 generally, 1.4.2 tabular summary, 1.4.1 use, 3.2.2 directors, and effect, 6.7.1.1 introduction, 3.5.1 disclaimer of onerous property circumstances in which notice may not be given, 3.6.3 effect, 3.6.2 exercise of power, 3.6.1 ‘property’, 3.6.1.2 remedy for parties affected, 3.6.4 tenant in liquidation, and, 10.2.4.4 ‘unprofitable contract’, 3.6.1.1 dissolution of company, 3.13.2 distribution of proceeds And see Distribution of proceeds of liquidation available property, 2.2.1 costs and expenses of process, 2.4.1– 2.4.4 debts due to members, 2.10 dividend for creditors, 3.11 interest, 2.8 introduction, 2.1.1 non-provable debts, 2.9 preferential debts, 2.5 prescribed part, 2.6.1–2.6.3 secured creditors, 2.3.1–2.3.8 set-off, 2.11.1–2.11.5 unsecured creditors, 2.7.1–2.7.3 dividend for creditors final dividend, 3.11.2 generally, 3.11.1 members’ voluntary liquidation, in, 3.11.3 expenses litigation expenses, 2.4.3.3 overview, 2.4.1 ranking, 2.4.3.1 relevant expenses, 2.4.3.2 final account compulsory liquidation, 3.13.1.2 voluntary liquidation, 3.13.1.1 fixed charges classes of asset, 2.3.6 generally, 2.3.4 importance of distinction, 2.3.7 meaning, 2.3.4

Liquidation – contd floating charges advantages, 2.3.5 crystallisation, 2.3.6 generally, 2.3.4 importance of distinction, 2.3.7 meaning, 2.3.4 foreign companies, 12.6.1 introduction, 3.1 involvement of and information to creditors compulsory liquidation, 3.9.2 creditors’ voluntary liquidation, 3.9.2 members’ voluntary liquidation, 3.9.1 removal of liquidator, 3.9.4 role of court, 3.9.3 liquidators duties, 3.7 powers, 3.8 release, 3.13.3 removal, 3.9.4 supervision, 3.9 liquidator’s duties general duties, 3.7.3 principal duties, 3.7.1 remedy for breach, 3.7.4 specific duties, 3.7.2 liquidator’s powers bringing proceedings to swell the assets, 3.8.4 consequence of agency, 3.8.6 continuation of supply of goods and services, 3.8.2 investigative powers, 3.8.3 joint liquidator, as, 3.8.5 main powers, 3.8.1 members’ voluntary liquidation And see Members’ voluntary liquidation commencement, 3.3 dealing with creditors, 3.12 generally, 1.4.2 tabular summary, 1.4.1 use, 3.2.1 overview, 1.4.2 partnerships, and, 1.5.2 prescribed part amount, 2.6.2 charges created before 15 September 2003, 2.6.3 meaning, 2.6.1 setting aside, and, 2.6.3 proving for debts by unsecured creditors debts not provable, 3.10.3 generally, 3.10.1 introduction, 2.7.1 provable debts, 3.10.2

369

Index Liquidation – contd proving for debts by unsecured creditors – contd quantification of claims, 3.10.6 secured creditors, 3.10.4 treatment by liquidator, 3.10.5 release of liquidator, 3.13.3 removal of liquidator, 3.9.4 secured creditors And see Secured creditors ‘commercial’ security, 2.3.3 crystallisation, 2.3.6 fixed charges, 2.3.4–2.3.8 floating charges, 2.3.4–2.3.7 generally, 2.3 introduction, 2.1.2 ‘security interest’, 2.3.1 validity of security, 2.3.2 ‘security interest’, 2.3.1 set-off application, 2.11.3.1 debts taken into account, 2.11.3.2 excluded debts, 2.11.3.3 relevance, 2.11.1 types, 2.11.2 tabular summary, 1.4.1 tenants, and arrears of rent, 10.2.4.1 disclaimer of lease, and, 10.2.4.4 forfeiture, 10.2.4.3 ongoing rent, 10.2.4.2 surrender of lease, and, 10.2.4.4 termination dissolution of company, 3.13.2 final account, 3.13.1 release of liquidator, 3.13.3 unsecured creditors acceleration of debts, 2.7.1 anti-deprivation principle, 2.7.3.1 effect of liquidation, 2.7.1 pari passu principle, 2.7.2 proving for debts, 3.10 rule in British Eagle, 2.7.3.2 uses of types of process compulsory liquidation, 3.2.3 creditors’ voluntary liquidation, 3.2.2 members’ voluntary liquidation, 3.2.1 validity of security, 2.3.2 Liquidators accounts, 3.7.2 agency, 3.8.6 change by creditors, 3.4.6.2 company voluntary arrangements, and, 8.2.2.3 conflict of interests, 3.7.3

Liquidators – contd continuation of supply of goods and services, 3.8.2 determination and discharge of liabilities, 3.7.2 duties general duties, 3.7.3 principal duties, 3.7.1 remedy for breach, 3.7.4 specific duties, 3.7.2 general duties, 3.7.3 getting in company’s property, 3.8.3.1 goods and services, 3.8.2 impartiality, 3.7.3 involvement of and information to creditors decision making by creditors, 3.9.2.2 liquidation committee, 3.9.2.1 opting out, 3.9.2.4 progress reports, 3.9.2.3 remuneration of liquidator, 3.9.2.5 inquiry into company dealings, 3.8.3.2 investigation of affairs, 3.7.2 investigative powers, 3.8.3 officer of the court, as, 3.7.3 Official Receiver’s role, 3.4.6.1 powers bringing proceedings to swell the assets, 3.8.4 consequence of agency, 3.8.6 continuation of supply of goods and services, 3.8.2 investigative powers, 3.8.3 joint liquidator, as, 3.8.5 main powers, 3.8.1 principal duties, 3.7.1 release, 3.13.3 removal, 3.9.4 remuneration, 3.9.1 report on directors’ conduct, 3.7.2 retention of accounts, 3.7.2 settlement of list of contributories, 3.7.2 skill and care, 3.7.3 specific duties, 3.7.2 supply of goods and services, 3.8.2 taking control of property, 3.7.2 List of contributories liquidators, and, 3.7.2 Litigation expenses distribution of proceeds of liquidation, and, 2.4.3.3 London Approach restructuring, and, 11.4.1–11.4.2 London Gazette voluntary liquidations, and, 3.3.1 LPA receiver generally, 1.4.4

370

Index Management of property receiver’s duties, and, 9.7.2.4 Material irregularity company voluntary arrangements, and, 8.2.6.3 ‘Mechanics of payment’ test appointment of receivers, and, 9.3.3.2 Members’ voluntary liquidation And see Liquidation commencement additional requirements, 3.3.2 common initial steps, 3.3.1 conversion to CVL, 3.3.2.2 process flowchart, 3.3.1 statutory declaration, 3.3.2.1 contingent debts, 3.12.1 conversion, 3.3.2.2 creditors’ voluntary liquidation, and, 3.2.2 dealing with creditors contingent debts, 3.12.1 introduction, 3.12 unknown creditors, 3.12.2 final dividends, and, 3.11.3 generally, 1.4.2 involvement of and information to creditors, 3.9.1 process flowchart, 3.3.1 proving for debts debts not provable, 3.10.3 generally, 3.10.1 provable debts, 3.10.2 quantification of claims, 3.10.6 secured creditors, 3.10.4 treatment by liquidator, 3.10.5 statutory declaration, 3.3.2.1 tabular summary, 1.4.1 unknown creditors, 3.12.2 use, 3.2.1 Misfeasance administrators, and, 4.7.2.2 directors, and, 6.4.4 Monitors And see Standalone moratorium challenges against conduct, 7.7.1 due diligence, 7.3.4 guidance, 7.5.1.2 powers, 7.5.2 remuneration, 7.5.3 role, 7.5.1 statutory role, 7.5.1.1 Moral hazard provisions restructuring, and, 11.8.2 Moratorium administration effect on insolvency proceedings, 4.4.1.1

Moratorium – contd administration – contd effect on other actions, 4.4.1.2 grant of permission, 4.4.3 interim moratorium, 4.4.1.3 purpose, 4.4.1 role of administrators, 4.4.2 company voluntary arrangements, and, 1.4.6 debts benefit to moratorium creditors, 2.4.2.3 benefit to Official Receiver, 2.4.2.2 overview, 2.4.1 pre-moratorium debts, 2.4.2.3 priority status, 2.4.2.1 landlords, and, 10.2.7 standalone moratorium And see Part A1 Moratorium alternative routes, 7.3 challenges , 7.7 companies, 7.2.1 continuing supply of goods and services, 7.4.5 court applications, 7.3.3 CVA proposal pending, where, 7.6.5 debts affected, 7.4.1 director’s conduct, 7.7.2 due diligence by monitor, 7.3.4 duration, 7.6 early termination, 7.6.6 effect, 7.4 eligible entities, 7.2 enforcement proceedings, and, 7.4.3 excluded companies, 7.2.2 generally, 1.4.5 goods and services, 7.4.5 initial period, 7.6.1 insolvency proceedings, and, 7.4.2 Insolvency Service guidance, 7.5.1.2 introduction, 7.1 monitors, 7.5 ‘out-of-court’ route, 7.3.2 overseas companies, 7.2.3 partnerships, 7.2.3 payment holiday, 7.4.1 powers of monitor, 7.5.2 procedure, 7.3 remuneration of monitor, 7.5.3 restrictions on company, 7.4.4 supply of goods and services, 7.4.5 tenants, and, 10.2.7 Moratorium creditors restructuring plans, and, 8.3.1.6 schemes of arrangement, and, 8.3.1.6 Mortgages security interests, and, 2.3.1

371

Index Nominees And see Company voluntary arrangements generally, 1.4.6 Non-executive directors And see Directors generally, 6.2.4 Non-provable debts distribution of proceeds of liquidation, and, 2.9 Notices administration, and, 4.6.2 receivership, and, 9.6.2 Officer of the court liquidators, and, 3.7.3 Official Receiver generally, 1.4.2 liquidators, and, 3.4.6.1 Ongoing rent tenant in administration, and, 10.2.3.2 tenant in liquidation, and, 10.2.4.2 ‘Onset of insolvency’ antecedent transactions, and, 5.1.3 partnerships, and, 1.5.2 Ordinary unsecured creditors acceleration of debts, 2.7.1 anti-deprivation principle, 2.7.3.1 effect of liquidation, 2.7.1 pari passu principle contracting out, 2.7.3.2 generally, 2.7.2 rule in British Eagle, 2.7.3.2–2.7.3.3 proving for debts debts not provable, 3.10.3 generally, 3.10.1 introduction, 2.7.1 provable debts, 3.10.2 quantification of claims, 3.10.6 secured creditors, 3.10.4 treatment by liquidator, 3.10.5 rule in British Eagle, 2.7.3.2 setting aside, and, 2.7.3 Out-of-court appointments And see Administration advantages, 4.3.1 company or directors, by accompanying documents, 4.3.4.5 interim moratorium, 4.3.4.3 introduction, 4.3.4 notice, 4.3.4.4 notice of intention, 4.3.4.2 restrictions on power to appoint, 4.3.4.1 flowchart, 4.3.1 generally, 4.3.1 interim moratorium, 4.3.4.3

Out-of-court appointments – contd qualifying floating charge holders, by generally, 4.3.5 notice, 4.3.5.3 notice of intention, 4.3.5.2 out of hours, 4.3.5.4 restrictions on power to appoint, 4.3.5.1 Pari passu principle And see Unsecured creditors contracting out generally, 2.7.3.2 introduction, 2.7.3 generally, 2.7.2 introduction, 2.7.1 rule in British Eagle, 2.7.3.2–2.7.3.3 Part A1 Moratorium alternative routes court applications, 7.3.3 due diligence by monitor, 7.3.4 introduction, 7.3.1 ‘out-of-court’, 7.3.2 application to foreign companies, 12.6.3 challenges conduct of director, 7.7.2 conduct of monitor, 7.7.1 companies, 7.2.1 continuing supply of goods and services, 7.4.5 court applications, 7.3.3 CVA proposal pending, where, 7.6.5 debts affected, 7.4.1 director’s conduct, 7.7.2 due diligence by monitor, 7.3.4 duration early termination, 7.6.6 extension by court order, 7.6.4 extension while CVA proposal pending, 7.6.5 extension with creditors’ consent, 7.6.3 extension without creditors’ consent, 7.6.2 initial period, 7.6.1 early termination, 7.6.6 effect continuing supply of goods and services, 7.4.5 debts affected, 7.4.1 enforcement proceedings, on, 7.4.3 insolvency proceedings, on, 7.4.2 payment holiday, 7.4.1 restrictions on company, 7.4.4 eligible entities companies, 7.2.1 exclusions, 7.2.2 partnerships, 7.2.3 enforcement proceedings, and, 7.4.3

372

Index Part A1 Moratorium – contd excluded companies, 7.2.2 extension court order, by, 7.6.4 while CVA proposal pending, 7.6.5 with creditors’ consent, 7.6.3 without creditors’ consent, 7.6.2 foreign companies, 12.6.3 generally, 1.4.5 goods and services, 7.4.5 initial period, 7.6.1 insolvency proceedings, and, 7.4.2 Insolvency Service guidance, 7.5.1.2 introduction, 7.1 landlords and tenants, and, 10.2.7 monitors challenges against conduct, 7.7.1 due diligence, 7.3.4 guidance, 7.5.1.2 powers, 7.5.2 remuneration, 7.5.3 role, 7.5.1 statutory role, 7.5.1.1 ‘out-of-court’ route, 7.3.2 overseas companies, 7.2.3 partnerships, 7.2.3 payment holiday, 7.4.1 powers of monitor, 7.5.2 procedure court applications, 7.3.3 due diligence by monitor, 7.3.4 introduction, 7.3.1 ‘out-of-court’, 7.3.2 remuneration of monitor, 7.5.3 restrictions on company, 7.4.4 supply of goods and services, 7.4.5 tenants, and, 10.2.7 Partnerships generally, 1.5.2 introduction, 1.5.1 Partnership voluntary arrangements And see Voluntary arrangements generally, 1.5.2 Pension Protection Fund entry of scheme into PPF, 10.4.2.1 level of compensation, 10.4.2.2 Pension schemes compensation entry of scheme into PPF, 10.4.2.1 level of compensation, 10.4.2.2 overview, 10.4.1 Pension trustees restructuring, and, 11.3.3 Pensions restructuring, and clearance procedure, 11.8.4 compromise of scheme deficit, 11.8.5

Pensions – contd restructuring, and – contd contribution notices, 11.8.2.2 criminal offences, 11.8.3 financial support directions, 11.8.2.1 generally, 11.8.1 moral hazard provisions, 11.8.2 notifiable events, 11.8.1 Petitioners compulsory liquidation, and, 3.4.2 Petitions compulsory liquidation, and court hearing, 3.4.4.4 notices, 3.4.4.2 presentation, 3.4.4.1 withdrawal, 3.4.4.3 Plant and machinery fixed charges, and, 2.3.8 Pledges security interests, and, 2.3.1 Possession of secured property secured creditors, and, 9.2.1.2 Practice directions sources of insolvency law, 1.2.7 Practice statements sources of insolvency law, 1.2.7 Preferences And see Antecedent transactions beneficiaries of proceeds of action, 5.3.7 court orders available, 5.3.6 examples, 5.3.4 generally, 5.3.1 ‘influenced by a desire’, 5.3.3 insolvent liquidation, 5.3.2 meaning, 5.3.1 secured creditors, and, 5.3.5 summary, 5.3.1 Preferential reditors restructuring plans, and, 8.3.1.6 schemes of arrangement, and, 8.3.1.6 Preferential debts distribution of proceeds of liquidation, and, 2.5 Pre-packaged administrations advantages, 4.12.3 attitude of courts, 4.12.8 ‘connected person’, 4.12.6.2 costs, 4.12.9 creditor protection, 4.12.7 criticisms, 4.12.4 directors, and, 6.5.5.2 evaluators, 4.12.6.4 generally, 4.12.1 introduction, 1.4.4 involvement of proposed administrator, 4.12.2 meaning, 4.12.1

373

Index Pre-packaged administrations – contd protection for creditors, 4.12.7 Regulations, 4.12.6 restructuring, and introduction, 11.6.2.2 sale of business, 11.7.2.3 sale of shares, 11.7.2.1–11.7.2.2 Statements of Insolvency Practice introduction, 4.12.7.1 SIP 13, 4.12.7.2 SIP 16, 4.12.7.3 ‘substantial disposals’, 4.12.6.3 viability statements, 4.12.7.4 Prescribed part amount, 2.6.2 charges created before 15 September 2003, 2.6.3 meaning, 2.6.1 setting aside, and, 2.6.3 Primary legislation sources of insolvency law, 1.2.4 Proceeds of officeholders’ actions distribution of proceeds of liquidation, and, 2.2.2 Progress report administration, and, 4.6.6 ‘Project company’ appointment of receivers, and, 9.3.2.2 ‘Property’ disclaimer of onerous property, and, 3.6.1.2 distribution of proceeds of liquidation, and, 2.2.1 Proposals company voluntary arrangements, and administrators, by, 8.2.2.3 content, 8.2.3 directors, by, 8.2.2.2 liquidators, by, 8.2.2.3 Prospective liability balance sheet test, and, 1.3.4 Proving for debts debts not provable, 3.10.3 generally, 3.10.1 introduction, 2.7.1 provable debts, 3.10.2 quantification of claims, 3.10.6 secured creditors, 3.10.4 treatment by liquidator, 3.10.5 Provisional liquidation compulsory liquidation, and, 3.4.5 Provisional liquidator generally, 1.4.3 Proxies administration, 4.6.5.6 company voluntary arrangements, 8.2.4.3 creditors’ voluntary liquidation, 3.3.3.7

Public companies serious loss of capital, 6.6.1 stock exchange announcements, 6.6.2 Public interest termination of administration, and, 4.11.6 Purchase of secured property secured creditors, and, 9.2.2 ‘Purpose of administration’ And see Administration corporate/business rescue, 4.2.2 meaning, 4.2.1 termination of administration, and, 4.11.6 Qualified floating charge holders appointment by court, 4.3.6.6 generally, 4.3.3 out-of-court appointments, 4.3.5 Qualifying floating charge holders And see Administration appointments of administrators, and generally, 4.3.5 notice, 4.3.5.3 notice of intention, 4.3.5.2 out of hours, 4.3.5.4 restrictions on power to appoint, 4.3.5.1 generally, 1.4.3 voluntary liquidations, and, 3.3.1 Ratification directors, and, 6.3.3 Receivers act in good faith, 9.7.2.1 appointment advantages, 9.3.1 available options, 9.3.1 City Exceptions, 9.3.2.2 effect of invalid appointment, 9.3.4 limitations, 9.3.2.1 notification to creditors, 9.6 other consequences, 9.5 overview, 9.2.1.1 procedure, 9.3.3 carrying on business of a company, 9.7.2.3 duties act in good faith, 9.7.2.1 carry on business of a company, 9.7.2.3 managing property, 9.7.2.4 primary duty, 9.7.1 sale of property, 9.7.2.2 secondary duties, 9.7.2 managing property, 9.7.2.4 powers sale of property, 9.8.2 sources, 9.8.1 reports, 9.6.4

374

Index Receivers – contd sale of property duty of receiver, 9.7.2.2 power of receiver, 9.8.2 status agent, as, 9.4.1 entry into contracts, 9.4.2 liquidation of company, on, 9.4.3 termination, 9.9 Receivership advantages, 9.3.1 application to foreign companies, 12.6.7 appointment of receiver advantages, 9.3.1 available options, 9.3.1 City Exceptions, 9.3.2.2 duties of receivers, 9.7 effect of invalid appointment, 9.3.4 limitations, 9.3.2.1 notification to creditors, 9.6 other consequences, 9.5 overview, 9.2.1.5 powers of receiver, 9.8 procedure, 9.3.3 status of receiver, 9.4 termination, 9.9 City Exceptions generally, 9.3.2.2 introduction, 1.4.4 company documentation, and, 9.5.4 consequences directors, on, 9.5.2 documentation, on, 9.5.4 existing contracts, on, 9.5.3 other insolvency proceedings, on, 9.5.1 directors, and general impact, 9.5.2 introduction, 6.7.1.3 distribution of proceeds expenses, 2.4.5 generally, 2.1.3 documentation of company, and, 9.5.4 effect directors, on, 9.5.2 documentation, on, 9.5.4 existing contracts, on, 9.5.3 other insolvency proceedings, on, 9.5.1 existing contracts, and, 9.5.3 expenses overview, 2.4.1 ranking, 2.4.5.1 relevant expenses, 2.4.5.2 Financial Collateral Arrangements (No 2) Regulations 2003 advantages, 9.10.2 application, 9.10.1 avoidance provisions, 9.10.2.2

Receivership – contd Financial Collateral Arrangements (No 2) Regulations 2003 – contd creation of security, 9.10.2.3 enforcement, 9.10.2.1 perfection of security, 9.10.2.3 foreign companies, 12.6.7 generally, 1.4.4 other insolvency proceedings, and, 9.5.1 tabular summary, 1.4.1 tenants, and, 10.2.2 termination, 9.9 Receivership accounts appointment of receivers, and, 9.6.6 Recognised professional bodies generally, 1.1.1 Registration voluntary liquidations, and, 3.3.1 Rejection of proposals administration, and, 4.6.5.9 Release of liquidator termination of liquidation, and, 3.13.3 Remuneration administration, and, 4.10.3 Rent arrears tenant in administration, and, 10.2.3.1 tenant in liquidation, and, 10.2.4.1 Rent deposits landlords, and, 10.2.8.1 Report on directors’ conduct liquidators, and, 3.7.2 Resignation directors, and, 6.5.3 Restrictive covenants employment contracts, and, 10.3.2.6 Restructuring And see Restructuring plan accountancy advisers, 11.4.4 agreements, 11.6.3 alternatives introduction, 11.6.2 maintaining status quo, 11.6.2.1 non-consensual restructuring, 11.6.2.2 solvent sale, 11.6.2.1 unplanned formal insolvency, 11.6.2.1 amendment of lending facilities, 11.6.1.1 business plan, 11.5.1 cash-flow drawdown on existing facilities, 11.4.6.1 introduction, 11.4.6 management, 11.4.6.3 new money, 11.4.6.2 company voluntary arrangements, and, 11.6.2.2

375

Index Restructuring – contd consensual options amendment of lending facilities, 11.6.1.1 debt reduction, 11.6.1.3 introduction, 11.6.1 refinancing, 11.6.1.2 restatement of lending facilities, 11.6.1.1 considerations choice, 1.6.3 conditions, 1.6.4 consensual, 1.6.2 meaning, 1.1.1 non-consensual, 1.6.2 parties, 1.6.1 prerequisites, 1.6.4 purpose, 1.6.3 co-ordinators, 11.4.3 debt reduction, 11.6.1.3 debt to equity swap flowchart, 11.7.2.1 generally, 11.7.1 drawdown on existing facilities, 11.4.6.1 due diligence, 11.5.1 financial advisers, 11.4.4 financial creditors holding debt, 11.3.2.3 intervention by court, 11.3.2.5 relevant debt, 11.3.2.1 rights of creditors, 11.3.2.4 value breaks, 11.3.2.2 financial environment advisers, 11.4.4 co-ordinators, 11.4.3 INSOL principles, 11.4.1–11.4.2 London Approach, 11.4.1–11.4.2 holding debt, 11.3.2.3 identifying problem available solutions, 11.2.3 generally, 11.2.1 ‘trigger point’, 11.2.2 independent reporting accountants, 11.5.2 information gathering, 11.5.1 INSOL principles, 11.4.1–11.4.2 introduction, 11.1 key stakeholders financial creditors, 11.3.2 introduction, 11.3 management, 11.3.4 pension trustees, 11.3.3 shareholders, 11.3.1 legal advisers, 11.4.4 London Approach, 11.4.1–11.4.2 management, 11.3.4 meaning, 1.1.2 new money, 11.4.6.2

Restructuring – contd non-consensual restructuring, 11.6.2.2 parties, 1.6.1 pension trustees, 11.3.3 pensions clearance procedure, 11.8.4 compromise of scheme deficit, 11.8.5 contribution notices, 11.8.2.2 criminal offences, 11.8.3 financial support directions, 11.8.2.1 generally, 11.8.1 moral hazard provisions, 11.8.2 notifiable events, 11.8.1 PR advisers, 11.4.4 pre-packaged administration or receivership, and introduction, 11.6.2.2 sale of business, 11.7.2.3 sale of shares, 11.7.2.1–11.7.2.2 prerequisites, 1.6.4 purpose, 1.6.3 refinancing, 11.6.1.2 restatement of lending facilities, 11.6.1.1 schemes of arrangement, and, 11.6.2.2 shareholders, 11.3.1 solvent sale, 11.6.2.1 stakeholders financial creditors, 11.3.2 introduction, 11.3 management, 11.3.4 pension trustees, 11.3.3 shareholders, 11.3.1 standstill agreement necessity, 11.4.5.1 parties, 11.4.5.3 terms, 11.4.5.2 steering committee, 11.4.4 types debt to equity swap, 11.7.1 pre-packaged administration or receivership, 11.7.2 unplanned formal insolvency, 11.6.2.1 valuations, 11.5.1 value breaks, 11.3.2.2 Restructuring plans adoption procedure flowchart, 8.3.1.10 generally, 8.3.1.8 application to foreign companies, 12.6.6 ‘arrangement’, 8.3.1.2 ‘blot’ or defect in plan, 8.3.7.5 class composition breadth of approach, 8.3.3.2 impact of fee payments, 8.3.3.3 persons falling within same class, 8.3.3.1

376

Index Restructuring plans – contd company voluntary arrangements, and, 10.2.6 composition of classes breadth of approach, 8.3.3.2 impact of fee payments, 8.3.3.3 persons falling within same class, 8.3.3.1 ‘compromise’, 8.3.1.2 conditional plans, 8.3.8.2 conditions for entry, 8.3.1.4 contracts for supply of goods and services, 8.3.1.10 creditors’ meetings adequacy of notice, 8.3.2.3 class composition, 8.3.3 conduct, 8.3.6 documents supplied, 8.3.5.2 excluded creditors of members, 8.3.4 explanatory statement, 8.3.5.3 interests in debt held indirectly, 8.3.5.4 introduction, 8.3.2.1 issues considered, 8.3.2.1 methods of notice, 8.3.5.1 notice requirements, 8.3.2.2 number of participants, 8.3.6.4 participating creditors of members, 8.3.3 ‘physical’ meetings, 8.3.6.3 procedure, 8.3.6 ‘virtual’ meetings, 8.3.6.3 voting thresholds, 8.3.6.2 cross-class cram-down, 8.3.7.7 discretion of court, 8.3.7.6 effective date, 8.3.8.1 excluded creditors or members generally, 8.3.4.1 no economic interest in plan, 8.3.4.2 explanatory statement, 8.3.5.3 fair representation of ‘classes’, 8.3.7.3 fairness of proposal, 8.3.7.4 fee payments, and, 8.3.3.3 financial difficulties, 8.3.1.4 foreign companies, and, 12.6.6 generally, 8.3.1.1 goods and services, 8.3.1.10 guarantees, and, 8.3.1.5 interests in debt held indirectly, 8.3.5.4 introduction, 1.4.8 joint liabilities, and, 8.3.1.5 landlords and tenants, and, 10.2.6 meaning, 8.3.1.1 members’ meetings adequacy of notice, 8.3.2.3 class composition, 8.3.3 conduct, 8.3.6 documents supplied, 8.3.5.2

Restructuring plans – contd members’ meetings – contd excluded creditors of members, 8.3.4 explanatory statement, 8.3.5.3 interests in debt held indirectly, 8.3.5.4 introduction, 8.3.2.1 issues considered, 8.3.2.1 methods of notice, 8.3.5.1 notice requirements, 8.3.2.2 number of participants, 8.3.6.4 participating creditors of members, 8.3.3 ‘physical’ meetings, 8.3.6.3 procedure, 8.3.6 ‘virtual’ meetings, 8.3.6.3 voting thresholds, 8.3.6.2 moratorium, 8.3.1.9 moratorium creditors, and, 8.3.1.6 no economic interest in plan, 8.3.4.2 number of participants, 8.3.6.4 overview, 8.3.1 participating creditors or members breadth of approach, 8.3.3.2 impact of fee payments, 8.3.3.3 persons falling within same class, 8.3.3.1 persons falling within same class, 8.3.3.1 persons with no economic interest in plan, 8.3.4.2 ‘physical’ meetings, 8.3.6.3 Practice Statement, 8.3.2 preferential creditors, and, 8.3.1.6 procedure flowchart, 8.3.1.10 generally, 8.3.1.8 proposers, 8.3.1.3 release of guarantees or joint liabilities, 8.3.1.5 restructuring, and, 11.6.2.2 sanction hearing ‘blot’ or defect in plan, 8.3.7.5 cross-class cram-down, 8.3.7.7 discretion of court, 8.3.7.6 fair representation of ‘classes’, 8.3.7.3 fairness of proposal, 8.3.7.4 introduction, 8.3.7.1 overview, 8.3.2.1 post-hearing impact, 8.3.8 properly convened ‘class’ meetings, 8.3.7.2 technical flaw in plan, 8.3.7.5 sanction of conditional plans, 8.3.8.2 secured creditors, and, 8.3.1.6 statutory moratorium, 8.3.1.9 supply of goods and services, 8.3.1.10 tabular summary, 1.4.1 technical flaw in plan, 8.3.7.5

377

Index Restructuring plans – contd utility supplies, 8.3.1.10 ‘virtual’ meetings, 8.3.6.3 voting thresholds, 8.3.6.2 Retained EU Insolvency Regulation (EU/1346/2000) And see Cross-border issues applicable proceedings, 12.2.2 application to UK after Brexit, 12.2.1 centre of main interests ascertaining, 12.2.3.1 change, 12.2.4.3 rebuttal of presumption, 12.2.3.2 establishment, 12.2.5 generally, 12.2.1 introduction, 12.1 jurisdiction to open proceedings, 12.2.3 rebuttal of registered office presumption, 12.2.3.2 relevant proceedings, 12.2.2 sources of insolvency law, 1.2.3 Retention of accounts liquidators, and, 3.7.2 Retention of title And see Retention of title creditors security, and, 2.3.3 Retention of title creditors all-monies clause, 10.5.2.4 effectiveness of provision, 10.5.2.1 establishing validity, 10.5.2 identification of goods by supplier, 10.5.2.3 incorporation of provision, 10.5.2.2 overview, 10.5.1 protection for insolvency officeholder, 10.5.4 removing company’s other rights, 10.5.3 simple clause, 10.5.2.4 Re-use of company names exceptions, 6.4.5.3 generally, 6.4.5.1 ‘prohibited name’, 6.4.5.2 Sale of property duty of receiver, 9.7.2.2 power of receiver, 9.8.2 secured creditors, and, 9.2.1.3 Schemes of arrangement adoption procedure flowchart, 8.3.1.10 generally, 8.3.1.7 application to foreign companies English courts having jurisdiction, 12.6.5.1 recognition in foreign jurisdictions, 12.6.5.2 ‘arrangement’, 8.3.1.2

Schemes of arrangement – contd ‘blot’ or defect in scheme, 8.3.7.5 class composition breadth of approach, 8.3.3.2 impact of fee payments, 8.3.3.3 persons falling within same class, 8.3.3.1 class composition breadth of approach, 8.3.3.2 impact of fee payments, 8.3.3.3 persons falling within same class, 8.3.3.1 composition of classes breadth of approach, 8.3.3.2 impact of fee payments, 8.3.3.3 persons falling within same class, 8.3.3.1 ‘compromise’, 8.3.1.2 conditional schemes, 8.3.8.2 contracts for supply of goods and services, 8.3.1.10 creditors’ meetings adequacy of notice, 8.3.2.3 class composition, 8.3.3 conduct, 8.3.6 documents supplied, 8.3.5.2 excluded creditors of members, 8.3.4 explanatory statement, 8.3.5.3 interests in debt held indirectly, 8.3.5.4 introduction, 8.3.2.1 issues considered, 8.3.2.1 methods of notice, 8.3.5.1 notice requirements, 8.3.2.2 number of participants, 8.3.6.4 participating creditors of members, 8.3.3 ‘physical’ meetings, 8.3.6.3 procedure, 8.3.6 ‘virtual’ meetings, 8.3.6.3 voting thresholds, 8.3.6.2 cross-class cram-down, 8.3.7.7 discretion of court, 8.3.7.6 documents supplied, 8.3.5.2 effective date, 8.3.8.1 excluded creditors or members generally, 8.3.4.1 no economic interest in scheme, 8.3.4.3 explanatory statement, 8.3.5.3 fair representation of ‘classes’, 8.3.7.3 fairness of proposal, 8.3.7.4 fee payments, 8.3.3.3 foreign companies, and English courts having jurisdiction, 12.6.5.1 recognition in foreign jurisdictions, 12.6.5.2 generally, 8.3.1.1

378

Index Schemes of arrangement – contd goods and services, 8.3.1.10 guarantees, and, 8.3.1.5 interests in debt held indirectly, 8.3.5.4 introduction, 1.4.7 joint liabilities, and, 8.3.1.5 meaning, 8.3.1.1 members’ meetings adequacy of notice, 8.3.2.3 class composition, 8.3.3 conduct, 8.3.6 documents supplied, 8.3.5.2 excluded creditors of members, 8.3.4 explanatory statement, 8.3.5.3 interests in debt held indirectly, 8.3.5.4 introduction, 8.3.2.1 issues considered, 8.3.2.1 methods of notice, 8.3.5.1 notice requirements, 8.3.2.2 number of participants, 8.3.6.4 participating creditors of members, 8.3.3 ‘physical’ meetings, 8.3.6.3 procedure, 8.3.6 ‘virtual’ meetings, 8.3.6.3 voting thresholds, 8.3.6.2 moratorium, 8.3.1.9 moratorium creditors, and, 8.3.1.6 no economic interest in scheme, 8.3.4.3 notices for meetings adequacy, 8.3.2.3 methods, 8.3.5.1 requirements, 8.3.2.2 overview, 8.3.1 participating creditors or members breadth of approach, 8.3.3.2 impact of fee payments, 8.3.3.3 persons falling within same class, 8.3.3.1 persons falling within same class, 8.3.3.1 persons with no economic interest in scheme, 8.3.4.3 ‘physical’ meetings, 8.3.6.3 Practice Statement, 8.3.2 preferential creditors, and, 8.3.1.6 procedure flowchart, 8.3.1.10 generally, 8.3.1.7 proposers, 8.3.1.3 release of guarantees or joint liabilities, 8.3.1.5 restructuring, and, 11.6.2.2 sanction hearing ‘blot’ or defect in scheme, 8.3.7.5 cross-class cram-down, 8.3.7.7 discretion of court, 8.3.7.6 fair representation of ‘classes’, 8.3.7.3

Schemes of arrangement – contd sanction hearing – contd fairness of proposal, 8.3.7.4 introduction, 8.3.7.1 overview, 8.3.2.1 post-hearing impact, 8.3.8 properly convened ‘class’ meetings, 8.3.7.2 technical flaw in scheme, 8.3.7.5 sanction of conditional schemes, 8.3.8.2 secured creditors, and, 8.3.1.6 statutory moratorium, 8.3.1.9 supply of goods and services, 8.3.1.10 tabular summary, 1.4.1 technical flaw in scheme, 8.3.7.5 utility supplies, 8.3.1.10 ‘virtual’ meetings, 8.3.6.3 voting thresholds, 8.3.6.2 Secondary legislation sources of insolvency law, 1.2.6 Secured creditors acquisition of secured property, 9.2.2 appointment of administrative receivers advantages, 9.3.1 generally, 9.3.1.1 introduction, 9.3.1 appointment of administrators advantages, 9.3.1 generally, 9.3.1.3 introduction, 9.3.1 appointment of non-administrative receivers advantages, 9.3.1 generally, 9.3.1.2 introduction, 9.3.1 appointment of receivers advantages, 9.3.1 available options, 9.3.1 City Exceptions, 9.3.2.2 court, by, 9.3.1.4 duties of receivers, 9.7 effect of invalid appointment, 9.3.4 fixed or floating charge assets, over, 9.3.1.2 introduction, 9.3.1 limitations, 9.3.2.1 notification to creditors, 9.5.4 other consequences, 9.5 overview, 9.2.1.5 powers of receiver, 9.8 procedure, 9.3.3 status of receiver, 9.4 termination, 9.9 distribution of proceeds ‘commercial’ security, 2.3.3 crystallisation, 2.3.6 fixed charges, 2.3.4–2.3.8

379

Index Secured creditors – contd distribution of proceeds – contd floating charges, 2.3.4–2.3.7 generally, 2.3 introduction, 2.1.2 ‘security interest’, 2.3.1 validity of security, 2.3.2 ‘commercial’ security, 2.3.3 ‘credit bid’, 9.2.2 crystallisation, 2.3.6 enforcement acquisition of secured property, 9.2.2 appointment of receiver, 9.2.1.5 available remedies, 9.2.1 foreclosure, 9.2.1.4 overview, 9.2.1.1 possession of secured property, 9.2.1.2 purchase of secured property, 9.2.2 sale of secured property, 9.2.1.3 fixed charges, 2.3.4–2.3.8 floating charges, 2.3.4–2.3.7 foreclosure, 9.2.1.4 free assets, 2.1.2 introduction, 9.1 possession of secured property, 9.2.1.2 preferences, and, 5.3.5 purchase of secured property, 9.2.2 restructuring plans, and, 8.3.1.6 sale of secured property, 9.2.1.3 schemes of arrangement, and, 8.3.1.6 ‘security interest’, 2.3.1 transactions at and undervalue, and, 5.2.5 validity of security, 2.3.2 Security commercial security, 2.3.3 types, 2.3.1 validity, 2.3.2 ‘Security interest’ generally, 2.3.1 Serious loss of capital directors, and, 6.6.1 Set-off administration, in, 2.11.4 company voluntary arrangements, and, 2.11.5 liquidation, in application, 2.11.3.1 debts taken into account, 2.11.3.2 excluded debts, 2.11.3.3 relevance, 2.11.1 security, and, 2.3.3 types, 2.11.2 Settlement of list of contributories liquidators, and, 3.7.2 Shadow directors And see Directors generally, 6.2.3

Share transfers consequences of liquidation, and, 3.5.3 Shareholders restructuring, and, 11.3.1 Shareholders’ meetings company voluntary arrangements, and effect of different decision by creditors, 8.2.4.6 functions, 8.2.4.1 preferential creditors, and, 8.2.4.5 proxies, 8.2.4.3 report of outcome, 8.2.4.7 secured creditors, and, 8.2.4.5 summoning, 8.2.2.5 valuing claims, 8.2.4.2 voting, 8.2.4.2, 8.2.4.4 Skill and care liquidators, and, 3.7.3 Sources of insolvency law common law, 1.2.8 Companies Act 2006, 1.2.2 EU Insolvency Regulation, 1.2.3 Insolvency Act 1986, 1.2.1 Insolvency Rules 2016, 1.2.5 practice directions and statements, 1.2.7 primary legislation, 1.2.4 retained EU Insolvency Regulation, 1.2.3 secondary legislation, 1.2.6 Statements of Insolvency Practice, 1.2.9 Special managers compulsory liquidation, 3.4.7 Special resolutions voluntary liquidations, and, 3.3.1 ‘Standalone’ moratorium alternative routes court applications, 7.3.3 due diligence by monitor, 7.3.4 introduction, 7.3.1 ‘out-of-court’, 7.3.2 application to foreign companies, 12.6.3 challenges conduct of director, 7.7.2 conduct of monitor, 7.7.1 companies, 7.2.1 continuing supply of goods and services, 7.4.5 court applications, 7.3.3 CVA proposal pending, where, 7.6.5 debts affected, 7.4.1 director’s conduct, 7.7.2 due diligence by monitor, 7.3.4 duration early termination, 7.6.6 extension by court order, 7.6.4 extension while CVA proposal pending, 7.6.5 extension with creditors’ consent, 7.6.3

380

Index ‘Standalone’ moratorium – contd duration – contd extension without creditors’ consent, 7.6.2 initial period, 7.6.1 early termination, 7.6.6 effect continuing supply of goods and services, 7.4.5 debts affected, 7.4.1 enforcement proceedings, on, 7.4.3 insolvency proceedings, on, 7.4.2 payment holiday, 7.4.1 restrictions on company, 7.4.4 eligible entities companies, 7.2.1 exclusions, 7.2.2 partnerships, 7.2.3 enforcement proceedings, and, 7.4.3 excluded companies, 7.2.2 extension court order, by, 7.6.4 while CVA proposal pending, 7.6.5 with creditors’ consent, 7.6.3 without creditors’ consent, 7.6.2 foreign companies, 12.6.3 generally, 1.4.5 goods and services, 7.4.5 initial period, 7.6.1 insolvency proceedings, and, 7.4.2 Insolvency Service guidance, 7.5.1.2 introduction, 7.1 landlords and tenants, and, 10.2.7 monitors challenges against conduct, 7.7.1 due diligence, 7.3.4 guidance, 7.5.1.2 powers, 7.5.2 remuneration, 7.5.3 role, 7.5.1 statutory role, 7.5.1.1 ‘out-of-court’ route, 7.3.2 overseas companies, 7.2.3 partnerships, 7.2.3 payment holiday, 7.4.1 powers of monitor, 7.5.2 procedure court applications, 7.3.3 due diligence by monitor, 7.3.4 introduction, 7.3.1 ‘out-of-court’, 7.3.2 remuneration of monitor, 7.5.3 restrictions on company, 7.4.4 supply of goods and services, 7.4.5 tenants, and, 10.2.7

Standstill agreements restructuring, and necessity, 11.4.5.1 parties, 11.4.5.3 terms, 11.4.5.2 Statement of affairs administration, and, 4.6.3 directors, and administration, 6.7.3.2 administrative receivership, 6.7.3.3 introduction, 6.7.3 liquidation, 6.7.3.1 receivership, and, 9.6.3 Statement of proposals administration, and, 4.6.4 Statements of Insolvency Practice pre-packaged administrations introduction, 4.12.7.1 SIP 13, 4.12.7.2 SIP 16, 4.12.7.3 sources of insolvency law, 1.2.9 Status of the company consequences of administration, and, 4.5.4 consequences of liquidation, and, 3.5.2 Statutory declarations of solvency members’ voluntary liquidation, and, 3.3.2.1 Statutory redundancy pay termination of employment, and, 10.3.2.2 ‘Step-in rights’ appointment of receivers, and, 9.3.2.2 Stock exchange announcements directors, 6.6.2 Sub-tenants landlord creditors, 10.2.8.2 Supervision of administrator calling for a decision, 4.10.1 creditors’ committee, 4.10.2 determining remuneration, 4.10.3 removal of administrator, 4.10.5 role of court, 4.10.4 Supervisors And see Company voluntary arrangements generally, 1.4.6 Supply of goods and services administrative receivers, and, 9.8.3.2 administrators, and, 4.8.4 company voluntary arrangements, and, 8.2.5.4 consent to termination of contract, 4.9.4.6 ‘contract for supply of goods and services’, 4.9.4.5 Excluded contracts, 4.9.4.7 guarantees, 4.9.4.3 introduction, 4.9.1

381

Index Supply of goods and services – contd liquidators, and, 3.8.2 overview, 4.8.4 restrictions on termination due to administration, 4.9.4.4 payment of pre-administration debts, 4.9.4.1 restrictions on termination for past breaches, 4.9.4.2 restructuring plans, and, 8.3.1.10 s 233 IA 1986, 4.9.2 s 233A IA 1986, 4.9.3 s 233B IA 1986, 4.9.4 schemes of arrangement, and, 8.3.1.10 statutory provisions, 4.9.1 Taking control of property liquidators, and, 3.7.2 Tenants administration, in arrears of rent, 10.2.3.1 disclaimer of lease, and, 10.2.3.4 forfeiture, 10.2.3.3 ongoing rent, 10.2.3.2 surrender of lease, and, 10.2.3.4 available remedies, 10.2.1 business rates, 10.2.3.4 company voluntary arrangements, 10.2.5 liquidation, in arrears of rent, 10.2.4.1 disclaimer of lease, and, 10.2.4.4 forfeiture, 10.2.4.3 ongoing rent, 10.2.4.2 surrender of lease, and, 10.2.4.4 overview, 10.1 Part 1A moratorium, 10.2.7 receivership, in, 10.2.2 rent deposits, 10.2.8.1 repayment from other sources effect on guarantors, 10.2.8.3 general rule, 10.2.8 rent deposits, 10.2.8.1 sub-tenants, 10.2.8.2 restructuring plans, 10.2.6 sub-tenants, and, 10.2.8.2 Termination of administration administrator’s application to court, on, 4.11.5 automatically after one year, 4.11.2 creditor’s application to court, on, 4.11.7 creditors’ voluntary liquidation, on, 4.11.3 discharge of administrator, and, 4.11.9 dissolution of company, on, 4.11.4 overview, 4.11.1 public interest winding-up petition, following, 4.11.8

Termination of administration – contd purpose of administration achieved, when, 4.11.6 Termination of employment administration moratorium, and, 10.3.2.4 breach of duty to consult, 10.3.2.3 claims, 10.3.2.2 duty to inform BIS, 10.3.2.5 effective date, 10.3.2.1 release from restrictive covenants, 10.3.2.6 Termination of liquidation dissolution of company, 3.13.2 final account compulsory liquidation, 3.13.1.2 voluntary liquidation, 3.13.1.1 release of liquidator, 3.13.3 Transactions at an undervalue And see Antecedent transactions court orders available, 5.2.6 defences, 5.2.3 determination of ‘value’, 5.2.2 examples, 5.2.4 meaning, 5.2.1 persons benefitting from proceeds of action, 5.2.7 secured creditors, and, 5.2.5 summary, 5.2.1 ‘value’, 5.2.2 Transactions defrauding creditors And see Antecedent transactions court orders available, 5.4.4 elements, 5.4.2 ‘for purpose of putting assets beyond reach of creditors’ mean’, 5.4.3 generally, 5.4.1 meaning, 5.4.1 summary, 5.4.1 Transfer of shares consequences of liquidation, and, 3.5.3 Transfer of undertakings general rules, 10.3.5.1 specific exceptions, 10.3.5.2 UNCITRAL Model Law cross-border issues, and, 12.3.1 Unfair dismissal termination of employment, and, 10.3.2.2 Unfair prejudice company voluntary arrangements, and, 8.2.6.2 Unknown creditors members’ voluntary liquidation, 3.12.2 Unpaid remuneration interaction between claims, 10.3.3.3 other considerations, 10.3.3.5 preferential debts, 10.3.3.1

382

Index Unpaid remuneration – contd recoverable sums, 10.3.3.2 ‘remuneration’, 10.3.3.1 status of claims, 10.3.3.4 Unprofitable contract disclaimer of onerous property, and, 3.6.1.1 Unregistered companies generally, 1.5.4 introduction, 1.5.1 Unsecured creditors acceleration of debts, 2.7.1 anti-deprivation principle, 2.7.3.1 effect of liquidation, 2.7.1 pari passu principle contracting out, 2.7.3.2 generally, 2.7.2 rule in British Eagle, 2.7.3.2–2.7.3.3 proving for debts debts not provable, 3.10.3 generally, 3.10.1 introduction, 2.7.1 provable debts, 3.10.2 quantification of claims, 3.10.6 secured creditors, 3.10.4 treatment by liquidator, 3.10.5 rule in British Eagle, 2.7.3.2 setting aside, and, 2.7.3 Utility supplies administrative receivers, and, 9.8.3.2 administrators, and, 4.8.4 company voluntary arrangements, and, 8.2.5.4 consent to termination of contract, 4.9.4.6 ‘contract for supply of goods and services’, 4.9.4.5 Excluded contracts, 4.9.4.7 guarantees, 4.9.4.3 introduction, 4.9.1 liquidators, and, 3.8.2 overview, 4.8.4 restrictions on termination due to administration, 4.9.4.4 payment of pre-administration debts, 4.9.4.1 restrictions on termination for past breaches, 4.9.4.2 restructuring plans, and, 8.3.1.10 s 233 IA 1986, 4.9.2 s 233A IA 1986, 4.9.3 s 233B IA 1986, 4.9.4 schemes of arrangement, and, 8.3.1.10 statutory provisions, 4.9.1 Validity of security secured creditors, and, 2.3.2

Valuations restructuring, and, 11.5.1 Viability statements pre-packaged administrations, 4.12.7.4 Voluntary arrangements companies, and And see Company voluntary arrangements generally, 8.1–8.3.8 introduction, 1.4.6 partnerships, and, 1.5.2 Voluntary liquidation And see Liquidation commencement common initial steps, 3.3.1 CVL requirements, 3.3.3 MVL requirements, 3.3.2 process flowchart, 3.3.1 consequences business of the company, on, 3.5.2 contracts, on, 3.5.5 directors, on, 3.5.1 documentation, on, 3.5.6 employment contracts, on, 3.5.5 legal proceedings, on, 3.5.4 share transfers, on, 3.5.3 status of the company, on, 3.5.2 generally, 1.4.2 involvement of and information to creditors creditors’ voluntary liquidation, 3.9.2 members’ voluntary liquidation, 3.9.1 proving for debts debts not provable, 3.10.3 generally, 3.10.1 provable debts, 3.10.2 quantification of claims, 3.10.6 secured creditors, 3.10.4 treatment by liquidator, 3.10.5 supervision of liquidator members’ voluntary liquidation, 3.9.1 tabular summary, 1.4.1 Voting administration generally, 4.6.5.5 valuing claims, 4.6.5.5 company voluntary arrangements generally, 8.2.2.4 valuing claims, 8.2.4.2 creditors’ voluntary liquidation, 3.3.3.6 Winding-up And see Liquidation generally, 1.4.2 tabular summary, 1.4.1 Winding-up order generally, 1.4.2

383

Index Winding-up petition consequences of administration, and, 4.5.1 generally, 1.4.2 Wrongful dismissal termination of employment, and, 10.3.2.2

Wrongful trading defences, 6.4.2.3 extent of liability, 6.4.2.4 generally, 6.4.2.1 standards expected of director, 6.4.2.2

384