Insolvency
Week Seven Study Manual Chapter 8 Lecture 1 of 3
Insolvency Law (1)
 This relates to companies in financial difficulties. There are several options open to
companies in financial difficulties.
 Administration –this aims to keep the company operating as a going concern or at least
to secure a better outcome for the creditors.
 Various football clubs have used this option as have Phones 4u. In 2020 well known
names like Carluccio’s Oasis and Warehouse have gone into administration
------------------------------------------------------------------------------------------------------- Another form of administration is the topical and somewhat contentious pre - pack
administration – we will study/ discuss this in Week 10
 See researchreserve.org Who has gone bust 2020 (technical articles)
Insolvency Law (2)
 Another option is to wind the company up whether it is insolvent or not.
 Many companies that are first put in administration are subsequently wound
up.
 Finally and separately a secured creditor may appoint a receiver to realise the
charged assets and satisfy the debt secured‐this is akin to a house
repossession.
Administration
 An administrator can be appointed by:
 The directors by a majority vote as with House of Fraser
 The company ‐ an ordinary resolution is required
 A creditor
 A Qualifying Floating Charge Holder QFCH
 In practice it is normally the directors that apply
Administration
 The applicant must show that:
 The company is or is likely to be unable to pay its debts.
 An administration order is likely to achieve the purpose of administration
 Must give notice of application to Qualifying Fixed Charge Holder who may
intervene
Duties of Administrator (1)
 Within 7 days s/he must:
 File notice of his appointment with Registrar of Companies.
 Require company’s officers and employees to provide a statement of affairs
(they have 11 days to do this)
Duties of Administrator (2)
 Within 8 weeks s/ he must submit a statement of his proposals for achieving
the aim of administration to:
 The Registrar
 The company’s creditors
 The company’s members
Duties of Administrator (3)
 Within 10 weeks s/he must hold a creditors’ meeting ‐ unless s/he considers
there is insufficient property to make a distribution to unsecured creditors
 The creditors may either accept the proposals or reject them (in which case
the court can make an order as it sees fit including the termination of the
administrator’s appointment).
Duties of Administrator (4)
 One year after appointment, the administrators appointment is terminated
unless it is extended by the court or once only by a prescribed majority of
creditors.
Consequences of Administration (1)
 There is a moratorium over the company’s debts ‐ that is no creditor can
enforce their debt during the administration period without the courts
permission.
 During the administration no resolution or court order to wind up the company
can be made.
 Administrator or courts consent is needed for enforcement of a fixed charge.
 No recovery of leased or HP property.
 No other legal proceedings.
Powers of the Administrator
 The powers of management are subjugated to the authority of the
administrator and s/he ‘may do anything necessarily expedient for the
management of the affairs, business and property of the company.’
In everyday language an insolvency Administrator has the power to:
Dismiss directors, managers and employees
Close down outlets
Negotiate the sale of the business of the company
Put forward re-structuring proposals to creditors.
Position of the Administrator (1)
 The Administrator is an agent of the company and the creditors as a whole. Any
creditor or member of a company may apply to the court if they feel that the
administrator has acted or will act in a way that has harmed or will harm his
interest.
Outcomes
 The administrator will either propose a rescue plan or state that the company cannot
be rescued.
The rescue proposal must be sent to all members and creditors
It must not:
 Affect the right of a secured creditor to enforce his security
 Result in a non-preferential debt being paid in priority to a preferential debt
 Result in one preferential creditor being paid a smaller proportion of his debt than
another.
Benefits of Administration
 The company does not necessarily cease to exist. It provides temporary relief
from creditors to allow a breathing space to formulate rescue plans.
 Creditors should obtain a return on their past debts and also a continued
business relationship in the future.
 Members will continue to have shares in the company and hopefully as a result
of a successful administration an enhanced share value.
Fixed Charge Receiver (1)
Law of Property Act (LPA) Receiver
 A receiver may be appointed by the holder of a fixed charge over land in the event of
the borrowers’ default
 His role is to collect payments in arrears and /or sell the property.
 He must act prudently in the realisation of the asset
 Any surplus proceeds (if any) must be returned to the borrower.
 This is the same process in essence as home repossessions by banks/building societies.
Remember Novak limited example.
Fixed Charge Receiver (2)
 Where an LPA receiver has been appointed, an administrator can still be appointed. In
such cases, the administrator is entitled to require the LPA receiver to vacate office.
 Once a company is in administration, fixed charge holders cannot enforce their security,
except with the consent of the administrator or the court.
 Receivership is not an insolvency procedure.
Week 10
Company voluntary arrangements
Pre pack administrations
We will study these in Week 10
We will not consider and hence no questions will be set on
administrative receivers see ICAEW study Manual.
City, University of London
Northampton Square
London
EC1V 0HB
United Kingdom
T: +44 (0)20 7040 5060
E: department@city.ac.uk
www.city.ac.uk/department
Insolvency
Week Seven Study Manual Chapter 8 Lecture 2 of 3
Liquidation
 Liquidation means that the company must be dissolved and its affairs wound
up or brought to an end. The assets are realised, debts are paid out of the
proceeds and any surplus amounts are returned to members.
 Compulsory liquidation and creditors’ voluntary liquidation are proceedings
for insolvent companies.
 Members voluntarily liquidation is for a solvent company.
Compulsory Liquidation (1)
 Under this method, the company is forced into liquidation by one or more of its
creditors.
 Under the Insolvency Act 1986 creditors may apply to the court for the
compulsory liquidation of a company There are seven possible reasons:
 The two most common reasons are
 The company cannot pay its debts
 It is just and equitable to wind up the company.
Compulsory Liquidation (2) - Unable to pay its debts
 A creditor must show either:
 He is owed more than £750 and has served on the company a written demand for
payment and the company has not paid within 21 days or
 He has obtained judgement for a debt but is unable to enforce it
 (Company fails either the commercial insolvency test or the balance sheet test).
Compulsory Liquidation (3) ‐The just and equitable ground
 A court can order the liquidation of a company on the grounds that it would be
just and equitable to do so. The courts have used this power to wind up
companies for reasons such as there is deadlock in the management of small
companies or that there was a justifiable lack of confidence in the management
or that the company was formed for a fraudulent purpose. It must be shown
that no other remedy is available.
Compulsory Liquidation (4) ‐ Effects of a compulsory liquidation order
 Official receiver appointed liquidator
 Liquidation deemed to have commenced at time when petition first presented
 Disposition of company property since commencement of liquidation deemed
void.
 Legal proceedings against company are halted
 Employees are dismissed‐think Lehman Bros/Thomas Cook September2019
 Any floating charge crystallises.
Voluntary Liquidation
 Voluntary liquidation is the decision taken by the members to wind up the
company. There are two methods that can be used:
 Members voluntary winding up –where the company is solvent but the
members decide to close the business down
 Creditors’ voluntary winding up –where the company is insolvent and the
members decide to wind the company up in conjunction with the creditors.
Members voluntary liquidation (1)
 In order to be a members’ voluntary winding up a special resolution must be
passed. The winding up commences on the passing of the resolution. A
liquidator is appointed.
 A voluntary winding up is a members’ voluntary winding up only if the directors
make and deliver to the registrar a declaration of solvency.
Members voluntary liquidation (2)
 Declaration of solvency ‐ this is a statutory declaration that the directors have
made full enquiry into the affairs of the company and are of the opinion that it
will be able to pay its debts within a specified period not exceeding 12 months.
 In a members’ voluntary winding up the creditors play no part since the
assumption is that the debts will be paid in full.
 The declaration must be signed by the majority of directors in front of a
solicitor
Members voluntary liquidation (3)
Next steps:
Call a general meeting with shareholders no more than 5 weeks later and pass a
resolution for voluntary winding up.
At the meeting appoint an authorised insolvency practitioner as a liquidator who will take
charge of winding up the company.
Advertise the resolution in The Gazette within 14 days.
Send the signed declaration to Companies House within 15 days of passing the resolution.
Creditors’ voluntary liquidation (1)
 This liquidation is NOT initiated by the creditors.
 Where a company intends to wind up voluntarily, but the directors are unable
to make a declaration of solvency the liquidation proceeds as a creditors’
voluntary winding up.
.
Creditors’ voluntary liquidation (2)
The directors must hold a meeting to confirm that the company is insolvent and
that steps are being taken to place the company into a CVL.
If 90 percent of the company’s shareholders sign a ‘Consent to Short Notice’, the
shareholders’ meeting can be called and held immediately.
If the shareholders do not agree, a notice period of 14 days will need to be given
before the shareholders’ meeting can be held.
Creditors’ voluntary liquidation (3)
The shareholders’ meeting will normally take place immediately before the creditors’ meeting. If the
shareholders agree to the liquidation, they can then confirm the directors’ choice of the liquidator.
The Creditors’ Meeting
After the shareholders’ meeting, there must be a creditors’ meeting, which is often held on the same
day.
The directors of the company must prepare and lay before the creditors’ meeting a statement of
affairs of the company, but they do not have to make a declaration of insolvency.
At the creditors’ meeting the creditors can appoint their own nominee to act as liquidator
Creditors’ voluntary liquidation (4)
Note
A Centrebind liquidation enables the appointment of an office-holder before creditor
agreement has been obtained, and the procedure is carried out with a specific aim in
mind. It’s used to protect creditor interests by quickly disposing of perishable goods, so
they don’t lose their value.
The Role of the Liquidator (1)
 Once the liquidator is appointed whether in a voluntary or compulsory winding
up, he must:
 Settle the list of contributories‐members who have an obligation to
contribute in a winding up.
 Collect and realise the company's assets.
 Discharge the company’s debts.
 Redistribute any surplus to the contributories according to the entitlement
rights attached to their shares.
The Role of the Liquidator (2)
 On his appointment, the powers of the directors cease save to the extent that
they are permitted to continue by the liquidator or in a voluntary winding up by
the company or creditors as appropriate.
 In certain cases charges or transactions entered into the company may be
avoided. This particularly applies to sales at an undervalue and preferences to
both connected and unconnected persons.
Priorities on liquidation (1)
 A liquidator in a compulsory winding up must, and in a voluntary winding up is
likely to, adhere to the following prescribed order for distributing the
company's assets:
 Costs including liquidator costs
 Secured creditors
 Preferential debts ‐employees’ wages/accrued holiday pay/contributions to
an occupational pension fund
 Floating charges‐subject to ring‐fencing (see next slide)
Continued next slide
Priorities on liquidation (2)
 Unsecured ordinary creditors‐a certain percentage of assets is ring‐fenced for
unsecured creditors where there is a minimum fund for distribution of £10,000
 This is 50% of the first £10,000 of floating charge realisations and 20% of the floating
charge realisations thereafter up to £600,000.
 Deferred debts‐dividends declared but unpaid.
 Members‐any surplus (if any).
See under Technical Articles Begbies Traynor titled who gets paid first
Completion of the Liquidation (1)
 Once the liquidation is complete, the liquidator must act as follows:
 In a voluntary winding up, he must prepare an account showing how the
winding up has been dealt with and lay it before a meeting of the members
and/or creditors. Within the following week he should then file details with the
Registrar. The company will be deemed to be dissolved three months later.
Completion of the Liquidation (2)
 In a compulsory winding up, the liquidator must go back to the court which
then makes an order dissolving the company. He then files the order and the
Registrar records on the company file that the company is dissolved as from the
date of the order.
Company voluntary arrangements
We will study these along with pre pack administrations in Week 10
City, University of London
Northampton Square
London
EC1V 0HB
United Kingdom
T: +44 (0)20 7040 5060
E: department@city.ac.uk
www.city.ac.uk/department
Insolvency
Week Seven Study Manual Chapter 8 Lecture 3 of 3
Individual voluntary arrangements (1)
 An individual voluntary arrangement (IVA) is an arrangement available to an
individual (including sole traders and partners) to reach a compromise with his
creditors, with the aim of avoiding bankruptcy.
 An IVA normally provides for the debtor to pay reduced amounts towards his
total debt over a period of, usually, five years. Once approved, an IVA binds all
the debtor’s creditors and none may petition for bankruptcy.
Individual voluntary arrangements (2)
 The individual via a licensed insolvency practitioner (LIP) submits proposals to
the court. If interim order is made LIP calls meeting within 14 days, notice of
which includes list of creditors/statement of affairs/proposals and LIP’s
comments.
 The creditors need a 75% majority in value to approve scheme. If approved LIP
supervises the scheme.
Individual voluntary arrangements ‐ advantages
The creditor:
 It is essential that an IVA is considered as it is likely to give greater satisfaction
to creditors than bankruptcy would.
 Costs of IVA considerably lower than bankruptcy enabling a higher return to
creditors.
Individual voluntary arrangements ‐ advantages
The individual:
 Not made bankrupt
 Can continue in business
 Flexibility in drawing up proposals ‐ maybe able to exclude his home and other
assets.
 Details of IVA not published
 Bank account
Bankruptcy (1)
 A person may become bankrupt either by petitioning the court himself or by his
creditor who is owed £5,000 or more petitioning the court for bankruptcy.
 Bankruptcy is effectively the equivalent for a sole trader or partnership –or
other individual‐of a compulsory winding up of a company.
 It should generally be considered as a very last resort after an IVA.
Bankruptcy (2)
 When the court makes a bankruptcy order an Official Receiver ‐Trustee is
appointed to administer the bankruptcy. He must act to maximise the funds
available to satisfy the creditors and pay them in a set order.
 If there is insufficient money to pay all unsecured creditors, he will pay so many
pence in the pound - effectively a part payment.
Bankruptcy – Order of Distribution to creditors
 Costs of realising the estate and remuneration of trustee.
 Pre‐preferential debts‐funeral expenses.
 Preferential debts‐Employees’ remuneration.
 Ordinary debts –where fund is insufficient to pay all the unsecured creditors
they rank equally
 Surplus –highly unlikely –to the bankrupt.
Effect of Bankruptcy
Debtor becomes an un‐discharged bankrupt:
 The bankrupt’s estate vests in the trustee in bankruptcy –he is allowed to keep
everyday clothes and household provisions for himself and his family as well as
the tools of his trade.
 He cannot act as a director of a company
 He faces criminal liability for failure to provide information or to cooperate
with the Official Receiver
 Under ICAEW rules he may not practice as a chartered accountant
Discharge from Bankruptcy
 One year after the bankruptcy order is made a bankrupt is discharged.
 This means all his debts are treated as discharged and all personal restrictions
are lifted.
 His credit history will have been damaged.
 See Technical Articles Taylor Wessing: Kaplan
Company voluntary arrangements
We will study these along with pre pack administrations in Week 10
City, University of London
Northampton Square
London
EC1V 0HB
United Kingdom
T: +44 (0)20 7040 5060
E: department@city.ac.uk
www.city.ac.uk/department