Consolidation Notes on BLP's Insolvency covering:
- Insolvency procedures (consensual agreement, pre-insolvency moratorium, formal arrangements, fixed charge receiver, administrative receiver, administration, liquidation)
- Order of priority in an insolvency
- Director personal liability in ...
Insolvency = Co’s inability to pay its debts (s. 123 IA 1986)
= s. 123 IA 1986: a Co is unable to pay its debts where:
(1) A creditor to whom the Co is indebted in a sum > £750 has served on the Co a written demand (in prescribed form) to pay the sum so due and the Co has for 3 weeks thereafter neglected to pay the
sum or to secure or compound for it to be to the reasonable satisfaction of the creditor.
(2) the value of the Co’s assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities
+ Corporate Insolvency and Governance Act 2020 (CIGA 2020)
the aim of to protect and balance the interests of competing creditors and to promote a culture where failing businesses are rescued and can recover
1. Directors in an insolvency situation
Directors have a duty to recognise when a Co is in financial difficulty and thus is facing an insolvency situation, otherwise could be personally liable to contribute to the Co’s assets
Indicators of financial difficulty = unpaid creditors, no use of overdraft facility for temporary relief as fully drawn, etc
Once an insolvency situation has been identified:
directors have a duty to protect the interest of the creditors (vs. no longer the members) otherwise they can be liable for damages under s. 212 IA 1986.
directors must decide whether to:
o aim for the survival of the Co, i.e., using a consensual contractual arrangement,, a CVA, a restructuring plan, a scheme of arrangement
o or whether the Co’s financial predicament is so great that at best, only the Co’s business can be rescued (sale of the business and assets as a going concern for the buyer), i.e., administration
2. Insolvency procedures
Formal insolvency procedures inc. administration, liquidation, restructuring plan, CVA or scheme of arrangement.
QFC = floating charge created by an instrument which:
States that Schedule B1, paragraph 14 IA 1986 applies
Is over the whole or substantially the whole of the Co’s property (either alone or in conjunction with other security)
Charging document states that §14 applies to the floating charge or purports to give the holding of the floating charge the right to appoint either an administrator or administrator receiver
Consensual agreement* Co in financial difficulty can negotiate and agree deals with one or more of its creditors to restructure its debts.
If agreement can be reached, it will often enter a restructuring agreement, which will have contractual force and if entered in a workable timescale,
will result in the Co avoiding a formal insolvency procedure.
o Agreement will usually require the Co to grant new or additional security, replace directors or senior employees, sell failing businesses or
subsidiaries or profitable ones, reduce the workforce, issue new shares (‘debt for equity’ swap), etc
Before commencing negotiations, the Co may have to enter a ‘standstill agreement’ with relevant creditors whereby they agree not to exercise their
usual rights and remedies for a specified period to allow the parties to have time to negotiate the terms of the RA.
Pre-insolvency moratorium* Use? These can be used to achieve consensual restructurings or as a preliminary step to proposing a restructuring plan, a CVA or a scheme of arrangement.
*These are contract-based deals How? Out of court procedure obtained by filing documents (e.g., statement that Co is unable to pay debts, statement from monitor to the effect of the
(restructuring or compromising with creditors) moratorium meaning that Co can be rescued as a going concern).
aiming to save the Co by negotiation with one
or more major creditors and which are only
When? Moratorium kicks in immediately and lasts for an initial period of 20 business days and no longer than one year unless courts decide otherwise.
binding on those creditors who agree to them
Directors can extend this period for a further 20 business days + by a further 20 days (so 40 days) with the approval of the majority in value of both
the unsecured creditors and secured creditors or the court
*These are not formal insolvency procedures
regulated by the IA 1986 or the 2020 CIGA
Extensions only provided that:
o The directors confirm all moratorium debts and all pre-moratorium debts not subject to statutory payment holiday have been paid when
Dis: due and payable
require the consent of all creditors
which the Co needs to do a deal to
o The monitor confirms that it is his/her view that the moratorium is likely to result in the rescue of the Co as a going concern
survive.
o Exception: no extension required where CVA proposed as moratorium continues automatically.
may require a pre-insolvency
moratorium or standstill
agreement with the relevant
creditors before commencing
negotiations to prevent creditor What?
enforcement action
Creditors’ rights are delayed or suspended while the moratorium exists unless the monitor or court otherwise allow.
Introduced by CIGA 2020. Rights include enforcing security, staying legal proceedings, winding up procedures, forfeiture of leases, taking possession of assets
Directors continue, during the moratorium to manage the company’s business and affairs.
!/! creditors and SH can challenge the actions of the directors during the moratorium on the grounds that their interests have been unfairly
prejudiced.
Pre-moratorium debts is a debt that is already overdue for payment by the Moratorium debts
time the moratorium begins or one which was incurred under a contract e.g., monitor’s fee, debts owed for supplies of goods and services, rent
entered into before the moratorium but falls due afterwards. due, salaries owed, etc.
With statutory With no statutory payment holiday so Co remains = no statutory payment holiday so Co remains liable for all amounts
payment holiday liable to pay all amounts due before the due before the moratorium commences
moratorium commences, e.g., loans, guarantees
for loans etc
Third party can recover this amount before the
moratorium commences through levying default
interest, terminating the loan, etc, but cannot
recover during the moratorium.
If Co is not cash flow solvent and can’t satisfy them then CIGA 2020 affords them protection:
The monitor must bring the moratorium to an end
These debts are given a ‘super priority’ provided the Co enters liquidation or administration within 12 weeks
after the end of the moratorium
Pre-moratorium agreements can come to an end in a variety of ways:
Entering into a consensual restructuring agreement
The court sanctions a restructuring plan or scheme of arrangement
The Co’ proposal for a CVA is approved by creditors
The Co takes steps to place itself into administration or liquidation
The moratorium expires
The court order the moratorium to end
The monitor brings it to an end if believes that ti is no longer likely that the Co can be rescued as a going concern
Does not prevent usual contractual remedies
Formal arrangement aiming to save the Co by Scheme of Arrangement: s. 895-901 CA 2006 Company Voluntary Arrangement (CVA): s. 1-7 IA Restructuring Plan* introduced as a result of CIGA
seeking a compromise or arrangement which 1986. 2020 and a hybrid of CVA and Scheme
is binding on all creditors including those who
vote against or not at all
*CVAs are often used as a wider part of a
restructuring and may be used by Co in an attempt
Adv: by the directors/ SH to retain control of the Co and
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