Corporate rescue
UK Rescue Culture
Reform
A preliminary mortorium
A major advantage of administration is that it provides the company with a moratorium (a period within which a winding up petition cannot be brought and the creditors cannot enforce their security)
A more limited moratorium is also available in relation to certain company voluntary arrangements
The government has proposed to provide a moratorium to any company that has a legitimate reason for seeking protection, this will be determined based on the financial state of the company, particuarly whether the company will become insolvent if action is not taken
If the moratorium is granted it will be supervised by an insolvency practionier known as the monitor
The moratorium will initially last for 28 days but can extended for a further 28 days, in certain cases it may be possible to extend the moratorium further
A flexbile restructuring plans
One notable disadvantage of a CVA is that it cannot affect the rights of secured creditors without their consent
The government has decided that a more flexible restructuring plan is needed that can bind all creditors
The plan will be available to both solvent and insolvent companies but some companies will be excluded
The terms of the plan will be for the company to determine with the process for entering into the plan being similar to that for a scheme of arrangement
In order for the plan to come into effect, ti will require the approval of at least 75% in value of the company's creditors within each class
Administration
The purpose of administration
The administrator of a company must perform his functions with the objective of
Rescuing the company as a going concern
Achieving a better result for the company's creditors as a whole than would be likely if the company were wound up
Realising property in order to make a distribution to one or more secured or preferential creditors
Entering administration
A company enters administration when the appointment of its administrator takes effects
There are 3 limitations on who can be appointed as an administrator
An administrator must be a qualified insolvency practionier
A person cannot generally be appointed as administrator of a company that is already in administration
A person cannot generally be appointed as administrator of a company that is in liquidation
3 ways to appoint an administrator
Appointment by the company or its directors
The company
This power of appointment is exercised by the members passing an ordinary resoution
The directors
Providing that the majority of the directors agree to the appointment
Neither the company nor its directors can appoint an administrator
Within 12 months of the ending of a previous administratior
Within 12 months of the ending of a moratorium which failed to result in a CVA being in force
If
A petition to wind up the company has been presented and has not yet been disposed of
An administrative application has been made and is not yet disposed of
An administrative receiver of the company is in office
Procedure
The company or its directors must provide at least 5 business days notice of their intention to appoint an administrator to
Any person who could appoint an administrative receiver
Any person who could appoint an administrator by virtue of being a qualifying floating chargeholder
This notice must be filed with the court along with other specified documentation. The person appointing the administrator must also file with the court a notice of appointment
Appointment by a qualifying floating chargeholder
The holder of a qualifying floating charge over the company's property can appoint an administrator
A floating charge will qualify if
The instrument that created the charge states that the chargeholder can appoint an administrator
The charge on its own or together with other security help by the chargeholder covers the whole or substantially the whole of the company's property
A qualifying floating chargeholder will not be able to appoint an administrator if
The floating charge in question is not enforeable
A provision liquidator has been appointed or an administrative receiver is in office
A qualifying floating chargeholder must provide at least 2 business days written notice to any prior holder of qualifying, floating charge unless the prior holder has consented in writing to the administrator being appointed
The qualifying floating chargeholder must file a notice of appointment with the court. The appointment of the administrator will take effect once this notice has been filed
Appointment by court order
The court can make an administration order to appoint a person as administrator
The court can only make an administration order following an application to the court which can only be made by specified persons
The company, the directors or one or more creditors
The supervisor of a CVA
The liquidator of the company
The FCA
The court will only make an administration order if 2 conditions are satisfied
The company is unlikely to be able to pay its debts
The administration order is reasonably likely to achieve the purpose of administration
The effects of entering administration
Dismissal of winding up petitions
The winding up of a company would frustrate the administrator's ability to fulfil the purpose of administration
A windi up petition will be
Dismissed if an administration order is made
Suspended if an administrator is appointed by a qualifying floating chargeholder
Dismissal of receivers
When a company enters administration by virtue of an administration order, then any administrative receivers will vacate office
Moratorium of insolvency proceedings
No resolution may be passed for the winding up of the company and no order may be made for the winding up
Moratorium on other legal processes
Unless the consent of the administrator or permission of the court is obtained
No step can be taken to enforce security over the company's property
No step can be taken to repossess goods in the company's possession under a hire purchase agreement
No landlord cannot exercise a right of forfeiture by re-entry
No legal process may be commenced or continued against the company or its property
Interim moratorium
Prior to a company entering administration, a company can be wound up or legal processes instigated. This could serve to frustrate the purposes of administration
To combat this, IA1986 provides for an interim moratorium which applies
Where an administration application has been made and the application has not yet been granted or dismissed or the application has been granted but not yet taken effect
In the time between a qualifying floating chargeholder filing a notice of appointment with the court up until
The date of the appointment of the administrator taking effect
5 business days following the filing and no administrator has been appointed
Exercise of managerial powers by the directors
The directors do not automatically vacate office when a company enters administration
The powers of directors are suspended as IA1986 provides that the company and any officer cannot exercise managerial power without the consent of the administrator
Publicity
The role of an administrator
Within 8 weeks of being appointed, the administrator must make a statement setting out proposals for achieving the purpose of administratin, this statement must be sent to the registrar of companies, every creditor and every member
Within 10 weeks, the administrator must seek a decision from the company's creditors as to whether they approve the proposals although creditors decision does not need to be sought if
The company has sufficient property to pay each creditor in full
The company has insufficient property to enable a distribution to be made to the unsecured creditors
If a creditors decision is required, then 2 methods exist to determine whether they approve the administrators proposals. The administrator can choose whether to use
The qualifying decision procedure with the details of this procedure to be decided by the administrator
The deemed consent procedure, under which the proposal will be approved unless 10% of the creditors in value object to the proposal
If the creditors do not approve the proposals, then the court may
Terminate the administrators appointment
Adjourn the hearing conditionally or unconditionally
Make an interim order
Make an order on a petition for winding up
Make any other order that it thinks appropriate
Powers of an administrator
Take possession of, collect and get in the property of the compnay
Sell or otherwise dispose of the property of the company by public auction or private contract
Raise or borrow money and grant security over the company's property
Bring or defend any action or other legal proceedings in the name of the company
Appoint agents and appoint and dismiss employees
Make any payment that is necessary or incidental to the performance of his functions
Carry on the business of the company and establish subsidiaries of the company
Present or defend a petition for the winding up of the company
Appoint or remove a director
Call a meeting of the company's members or seek a decision from the company's creditors
Apply to the court for directions in connection with his functions
Ending administration
A company ceases to be in administration when the administrator's appointment ceases
As administration adversely affects the company's creditors it is vital does not remain in administration for an excessive period of time
An administrators appointment will cease one year after it takes effect
Can be extended
Applying to the court for an order
Can be extended once for up to one year by obtaining consent of each secured creditor and if the company has any the unsecured creditors
Can also cease in a number of other ways
The administrator can also apply to the court if they think that
The purpose of the administration cannot be achieved
The company should not have entered administration
The company's creditors make an application
If the administrator thinks that the purpose of administration has been sufficiently achieved they can file a notice with the court and Registrar
A creditor may apply to the court for an order ending the appointment of the administrator if they can show that the motive for appointing the administrator was improper
Where a company in administration is the subject of a winding up petition in the public interest, the court will either order
The administrators appointment to cease
The administrators appointment shall continue to have effect
If the administrator of a company thinks that the company has no property to distribute, they should send a notice of that effect to the registrar. The registrar will register the notice and 3 months after, the company is deemed to have disolved
Company voluntary arrangements
A CVA is an insolvency procedure and is used by insolvent companies to try rescue the business
Implementing a CVA
Proposal may come from
The company's directors if not in administration or liqudiation
The administrator
The liquidator
The nominee
The CVA will need to be supervised by a qualified insolvency practionier
The rules relating to nominees depend upon the status of the company, if the company is in administration, then the administrator can act as nominee
The nominee will summon a meeting and seek a decision from the creditors as to whether they approve the proposal
The nominee must within 28 days of being given notice of the proposed CVA submit a report to the court stating whether
The proposed CVA has a reasonable prospect of being approved and implemented
The proposal should be considered by a meeting of the company and the creditors
The date, time and place at which he proposes a meeting should be held
Approval of the proposal
The proposed CVA will need to be approved by the company and its creditors
The nominee must invite the company's members to a meeting to consider the proposed CVA to obtain approval. The members need to be provided with 14 days notice and will approve the proposal if a majority of them vote in favour
The creditors will approve the proposal by way of a qualifying decision procedure. The details of this procedure will be determined by the nominee. Alternatively the deemed consent procedure can be used under which the proposal will be approved unless 10% of the creditors in value object to the proposal
The decisions of the company and the creditors must be reported to the courts, if the decisions of the company and creditors conflict, the decision of the creditors prevail
A member can apply to the court within 28 days of the decisions
If the proposal is approved by both the company and its creditors it will come into effect at the time when the creditors approved it. The nominee will supervise the CVA and will become known as the supervisor
Challenging the CVA
Within 28 days of the report of the meeting being given to the court, a nominee liquidator or administrator or anyone who had a right to vote as a member or creditor can apply to the court on the ground that
The CVA unfairly prejudices the interests of a creditor, member or contributory of the company
There has been some material irregularity at or in relation to the meeting or the decision procedure
If the court agrees with the applicant, it can
Revoke or suspend any decision approving the CVA
Give directions for a further meeting of the company to consider a revised proposal
DIrect any person to seek a decision from the creditors as to whether they approve the revised proposal
The small company moratorium
A CVA with a moratorium is only available to eligible companies, namely those classified as small
Certain companies will not be eligible for the moratorium including
A company in administration
A company that is being wound up
A company that is already to a CVA
A company that has had a moratorium in force at any time during the previous 12 months
If the directors of an eligible company wish to obtain a moratorium they must submit to the nominee a document setting out the terms of the proposed CVA and a statement of the company's affairs. The nominee will then submit to the directors a statement indicating whether or not
The proposed CVA has a reasonable prospect f being approved and implemented
If the company is likely to have sufficient funs available to it during the proposed moratorium to enable it to cary on its business
The proposed CVA should be considered by a meeting of the company and creditors
The directors of the company must then file specified documents with the court including the terms of the proposed CVA, a statement of company affairs a statement from the nominee consenting to act and a statement from the nominee that the proposed CVA has a reasonable prospect of being approved and implmented
While the moratorium is in effect
No petition may be presented to win up the company and no resolution may be passed to wind up the company
No meeting of the company can be called except with the consent of the nominee or leave of the court
No administrator can be appointed by the company, its directors or by a qualifying floating chargeholder nor can an administrative receiver be appointed
No other steps may be taken to enforce any security over the company's property or to repossess goods in the company's possession under any hire-purchase agreement except with the leave of the court and subject to such terms as the court may impose
Receivership
A mechanism that allows a secured creditor to recover what is owed to them
A secured creditor can appoint a receiver in one of two ways
The loan agreement or charge instrument between the creditor and the company might give the creditor the right to appoint a receiver. The receiver's duty is to the creditor who appointed him and his clients interests will trump those of the company or other creditor
The creditor can apply to the court and the court can then appoint a receiver. In this situation the receivers duty is to the court and he does not need to follow the creditors instructions
The receivers principal role is to seize the secured assets, sell them and then use the proceeds to satisfy the debt of the creditor who appointed him.
It may be the case that the loan agreement provides that the receiver will also be appointed as an agent of the company, in which case the receiver will be able to enter into certain acts on the company's behalf and may even have powers of management akin to those of the directors
Administrative receivership
An administrative receiver is a receiver or manager of the whole or susbtnaitally the whole of a company's property
They are appointed by or on behalf of the holders of any debentures of the company secured by floating charge
As floating charges tend to be taken over the entire company's business, administrative receivers have considerable powers that often displace those of the directors