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outcomes for insolvent companies - Coggle Diagram
outcomes for insolvent companies
what is corporate insolvency?
the inability of a company to pay its debts
aim= save companies in financial difficulties, control company directors and protect companies' creditors
Definition of Corporate Insolvency
Under Sections 122 and 123 of the Insolvency Act 1986, a company is considered insolvent if it meets
one or more of the following conditions:
a) Unpaid Statutory Demand:
a) A creditor issues a statutory demand for an
outstanding sum of £750 or more
; and
b) The company fails to pay or reach an agreement with the creditor within
21 days.
b) Unpaid Court Judgment:
A creditor obtains a judgment against the company; and
Enforcement of the judgment is unsuccessful in obtaining full payment.
c) Cash Flow Test:
The company cannot pay its debts as they fall due (as does not have enough available cash- i.e. more liabilities than assets)
d) Balance Sheet Test:
The
company’s liabilities exceed its assets
, demonstrating negative net worth.
total assets l(fixed + current) ess total liabilities (due within 1 year and after 1 year)
N.B balance sheet is only snapshot- financial situation could change meaning company is no longer insolvent. court thus takes into account all available evidence about company eg. future plans when working out if insolvent
Importance of Establishing Insolvency
Prerequisite for Insolvency Proceedings:
Insolvency is generally required for a creditor to initiate actions like winding-up petitions.
determining when to take legal actions against a company
Director Liability:
Directors could face personal liability for actions taken while the company was insolvent, such as wrongful or fraudulent trading.
assessing directors’ responsibilities
administration
duties of administrator
A must perform their duties in
interests of all companys creditors as whole.
Primary Objective: Rescue the Company as a Going Concern:
this means the administrator must attempt to restructure the company’s operations, financial obligations, or business model so that it can continue operating, potentially turning around its financial position and returning to profitability.
If successful, this will ideally preserve jobs, the company’s assets, and its value, and provide the best outcome for creditors.
Secondary Objective: Achieve a Better Result for Creditors than Liquidation:
If rescuing the company as a going concern is not practicable (e.g., due to financial instability or operational issues), the administrator must aim to achieve a better result for creditors than would likely result from liquidation.
-
Tertiary Objective: Realisation of Assets to Satisfy Secured and Preferential Creditors:
If neither rescuing the company nor achieving a better result for creditors through restructuring or sale is feasible, the administrator will then realise (sell) the company’s property or assets to satisfy the claims of secured and preferential creditors.
In this stage, the administrator’s duty is to ensure the assets are sold at the best possible value, and any proceeds are distributed according to the statutory priorities outlined in the Insolvency Act (e.g., paying off secured creditors first, followed by preferential creditors, and then unsecured creditors).
commencing administration
2 routes
1. court route
(court order for administration)
The court will only grant this order if the following conditions are met:
1. Inability to Pay Debts:
The company must be likely to become unable to pay its debts.
2. Purpose of Administration:
The court must be satisfied that the administration order is likely to achieve one of the e purposes of administration, which generally include rescuing the company, achieving a better result for creditors than liquidation, or realising property to pay secured creditors.
Notification
: Once the application for administration is made, the applicant (whether the company, its directors, or a creditor) must notify certain parties, including:
Any person who has appointed or is entitled to appoint an administrative receiver.
Any qualifying floating charge holder (QFCH) who is entitled to appoint an administrator.
It is often used for
larger companies
or when there is u
ncertainty regarding the company's ability to recover through administration.
2. out-of-court route
2b. appointment by (qualified fixed charge holder) QFCH
a lender with a floating charge that gives them the power to appoint an administrator
Enforceable Floating Charge:
The charge must be enforceable, meaning the lender must have the right to enforce the floating charge, typically due to the company being in default (e.g., failing to pay debts).
Notice and Declaration:
The QFCH must file a notice of appointment at the court as well as certain documents. notice must include statutory declaration by lender, stating that:
the lender is a holder of a QFC.
the floating charge is enforceable; and
that the appointment complies with the requirements of Schedule B1 IA 1986
administration begins when these documents are filed at court
Duty of the Administrator:
Once the administrator is appointed, they have a duty to act in the best interests of all creditors. This is in contrast to an administrative receiver, who has a primary duty to the lender who appointed them, and only secondary duties to other creditors
2a. out-of-court route- appointment by company/directors
This is the most common method in practice, and it involves the company or its directors initiating the administration process
Notice of Intention
: The company must serve a notice of intention to appoint an administrator to:
The court.
Any QFCH (qualifying floating charge holder).
Any lender entitled to appoint an administrative receiver.
Statutory Declaration:
The directors must also file a statutory declaration at the court, which confirms:
The company is unable to pay its debts.
The company is not in liquidation.
Moratorium
: Once the notice of intention to appoint is filed at the court, a moratorium automatically comes into effect.
Limitations
: If a winding-up petition has already been filed, the company cannot use the out-of-court route and must instead seek a
court orde
r to appoint an administrator instead of going into liquidation.
designed to be a simpler, faster process for appointing an administrator, and it is often used when the company is in
urgent need of intervention
process of administration
Proposals
: The administrator must submit their proposals for the company’s future to the creditors. These proposals typically outline:
The actions the administrator will take to either rescue the company or maximide returns for creditors.
The expected recovery for creditors, and how it compares to what would be received in liquidation.
The administrator's plan for managing the company’s debts.
Amendments and Information Requests:
Creditors may request further details or suggest amendments to the administrator's proposals, particularly if the administrator has been appointed by the directors of the company. If creditors suspect conflicts of interest, they might ask for more clarity or propose changes.
Voting on the Proposals
More than 50%
in value of the creditors (present and voting) must approve them.
if
unconnected creditors owed 50% or less
in value vote against, proposal still passes
if
more than 50% unconnected
vote, proposals will fail
effect of administration order
Once the administration order has been made, the
company is managed by the administrator
and the directors’ powers cease, even though they remain in office.
The administrator is in
control of the company’s assets, although they do not own them, and the administrator carries
out the proposals approved by the creditors.
Throughout the administration, **the moratorium
described above continues**
administrators powers
specific powers
(a) removing and appointing directors;
(b) paying creditors
, but only with the court’s permission if the payment is to an unsecured
creditor;
(c) calling a meeting of creditors or shareholders;
(d) dealing with floating charge property
(e) dealing with fixed charge property
(f) investigating anc challenging past transactions;
and
(g)commencing fraudulent or wrongful trading proceedings against directors
General Powers of the Administrator
administrators also have the authority to
do anything necessary or expedient for the management of the company's business, affairs, and property.
This broad power gives the administrator flexibility to take actions as they see fit to achieve the best outcome for creditors.
Order of Distribution of Assets
The order of distribution of the company’s assets in administration follows a similar pattern to liquidation, which typically prioritises creditors with fixed charges first, followed by floating charge holders, preferential creditors, and then unsecured creditors.
end of administration
Automatic End:
Administration automatically ends one year from the date the administration order took effect. This is the default time limit set for administration.
Extension of Time:
The one-year period can be
extended by the court if necessary
, based on the progress or needs of the administration.
Court Application to End Early:
The administration can be ended earlier than the one-year period, either by an application to the court:
if administrator believes the
objective has been achieved;
or
administrator determines that the
objectives cannot be achieved,
by application to court by
creditor
- who cn present winding up petition
pre-pack administration (pre-pack)
a process where a
company enters administration and immediately sells its business or assets,
often to the
existing management or a connected party.
legal way for selling business as going concern
sale agreed before administrator appointed
saves jobs and maintains bus continuity
unsecured creditors not consulted, and the sale proceeds typically go toward repaying secured and preferential creditors, and unsecured creditors may receive little or nothing.
now additional more onerous requirements on pre-packs involving connected parties, on behalf of unsecured creditors e.g. greater scrutiny, disclosure to creditors
basics
process whereby administrator (independet insolvency practictioner) appointed to run company and
make any changes necessary to improve its financial performance
alternatively
, A will aim to get the company into a position where it
can be sold
, which is often more valuable than liquidating it.
moment admin start
s, there is a
statutory moratorium
- prevents anyone commencing or continuing with legal action against company, enforce judgment or issue winding up petition without administrators consent
protects company during administrtion
this gives the A
time and space
to investigate company, viability and maximise amount of money available to creditors
Company voluntary arrangement
f
ormal, legally binding agreement between an insolvent company and its creditors to restructure or reduce its debts,
allowing the company to avoid liquidation. It’s typically used when the c
ompany is still fundamentally viable but faces temporary cash flow issues
.
Agreement
: It is a written contract between the company and its creditors, in which the
creditors agree
to either:
Receive payment over a longer period
, or
Accept partial payment of the debt.
Binding Agreemen
t: Once the CVA proposal is approved, it becomes legally binding
on all unsecured creditors for past debts,
but does not affect future debts.
however CVA does not affect rights of secured and preferential creditors (to recover their debts), unless they agree to it
Purpose
: The primary goal is to allow the company to continue operating, avoiding liquidation and allowing it to work through its financial difficulties. It’s often used when the b
usiness still has long-term potential but needs breathing space to get back on track
.
Approval Requirements:
75% in value
of the company’s creditors must
approve
the proposal; and
50% of non-connected creditors
must also approve the CVA.
chair of CVA meeting (generally Insolvency pract (IP) seeking to be supervisor of process) decides if creditors are connected or not.
secured creditors can only vote if their debt is unsecured (shortfall)
A company could use the CIGA 2020 moratorium as well as propose a CVA simultaneously. The moratorium would give the company time to develop and enter into the CVA agreement, during which creditors cannot take enforcement actions.
restructuring plans- CIGA 202
Court-Supervised Process:
The restructuring plan is a formal arrangement or
compromise
between the
company and its creditors
(secured and unsecured) and
shareholders
.
It is
court-supervised,
meaning it
requires approva
l from the court for it to be implemented
Eligibility for Use:
A company does not need to be insolvent to apply for a restructuring plan; h
owever, it must be facing financial difficulties or likely to face such difficulties in the future.
Director’s Role:
The company’s directors usually
prepare the restructuring plan
, as they have the necessary financial information. They then
apply to the court to call meetings with creditors and shareholders to vote
on the plan.
In practice,
creditors or shareholders can also initiate the process,
but it is typically director-driven.
Court Hearings and Voting:
2 court hearings
are involved in the process:
First hearing
: Creditors and shareholders are given an opportunity to make representations.
Second hearing:
The court decides whether to approve (sanction) the proposed restructuring plan.
Between the two hearings, meetings of creditors and shareholders are held, during which they vote on the plan.
Voting Requirements:
Creditors and shareholders are
divided into classes based on their interests
, and
each class votes on the plan.
The plan will be approved by a class if
75% by value of that class votes in favor of it.
This voting requirement is based on the value of the debt or shares in that class, not the number of creditors or shareholders.
Differences from Schemes of Arrangement:
Unlike schemes of arrangement, which require a majority in number of creditors or shareholders, the restructuring plan focuses on a majority by value within each class.
Cross-Class Cram Down:
. This allows the company to
proceed with a restructuring plan even if one class of creditors or shareholders votes against it (dissenting class creditors 'crammed down')
as long as the court is satisfied that:
The dissenting class would not be worse off under the restructuring plan than they would be in the event of liquidation.
free-standing moratorium- CIGA 2020
Purpose
:
To provide the company with
breathing space from creditor actions
for pre-moratorium debts while it works on a
rescue plan/restructuring
Key Protections:
Creditors are restricted from taking actions to enforce payment of pre-moratorium debts
(debts incurred before the moratorium started).
Prevents winding-up petitions, repossession of secured assets, and court proceedings against the company during the moratorium
Directors Retain Control:
Unlike other insolvency procedures (e.g., administration), the company's directors remain in control of day-to-day operations.
An independent insolvency practitioner, called the monitor, oversees the moratorium and ensures compliance.
Debts
:
Pre-moratorium debts are suspended
(e.g., rent arrears or supplier invoices).
Certain debts must be paid during the moratorium,
including:
Employee wages.
Monitor’s fees.
Goods or services supplied during the moratorium.
Eligibility
:
Available only to
English companies without existing winding-up petitions.
Companies must be
unable or likely to become unable to pay their debts.
Certain companies, such as
banks and insurance providers, are excluded.
Companies that have had a
moratorium in the previous 12 months are not eligible
.
Duration
:
Initial period:
20 business days
from the day after the moratorium takes effect.
Extension
:
By filing additional documents, the moratorium can be extended for
another 20 business days.
With
creditor consent,
it can be extended for
up to one year.
informal agreements with creditors
Informal agreements with creditors are not statutory and are
not binding
, so they carry the risk that
any of the creditors may choose to wind up the company instead of going ahead with what was previously informally agreed.
For this reason, they are often not a feasible or
recommended option
schemes of arrangement
not strictly an insolvency procedure (although they are similar to CVAs, because they involve coming to an agreement with creditors).
They can be entered into at any time during the company’s life, not necessarily when it is insolvent.
They necessitate
2 court hearings
and
meetings of creditors and shareholders
, and are therefore
expensive and more difficult procedurally than CVAs.
They tend to be used to restructure large companies with complicated structures, often before they are taken over.
options for secured creditors
Secured creditors, who lend money against collateral, have specific rights and options if a company defaults on its obligations. These options ensure the creditor's priority in recovering the loan amount, often by utilizing the charged property.
1. Law of Property Act (LPA) Receivers
Who Appoints?
Fixed charge holders appoint LPA receivers.
Purpose
:
The receiver takes control of and sells the charged property to repay the creditor.
Key Features:
Usually appointed under the charge document
Not necessarily a licensed insolvency practitioner.
The receiver’s interest ends after selling the property.
Proceeds are used to repay the secured creditor:
Shortfall: If the proceeds are insufficient, the creditor becomes an unsecured creditor for the remaining debt.
Surplus: Any excess is returned to the company and made available to unsecured creditors.
2. Administrative Receivers
Who Appoints?
Floating charge holders over the company's whole undertaking appoint administrative receivers.
Key Features:
Only applicable to floating charges created before 15 September 2003.
For charges created after this date, the administration process is used instead.
The administrative receiver runs the company, manages assets, and sells them to repay the secured creditor.
Appointment of an Administrative Receiver
Trigger Events:
Listed in the loan agreement, such as:
Failure to make loan repayments.
The company being unable to pay its debts.
Breach of loan terms.
Filing of a winding-up petition.
Duties of the Receiver:
Sell charged assets to repay the floating charge holder.
Pay their own costs and then distribute remaining proceeds to the creditor.
Outcome:
In theory, once debts are settled, the administrative receiver resigns, and directors resume control.
However, in practice, liquidation often follows administrative receivership, as selling charged assets usually leaves the company unable to continue as a going concern.