- •Contents
- •Acknowledgements
- •Table of cases
- •Abbreviations
- •Introduction to the second edition
- •1 The roots of corporate insolvency law
- •Development and structure
- •Corporate insolvency procedures
- •Administrative receivership
- •Administration
- •Winding up/liquidation
- •Formal arrangements with creditors
- •The players
- •Administrators
- •Administrative receivers
- •Receivers
- •Liquidators
- •Company voluntary arrangement (CVA) supervisors
- •The tasks of corporate insolvency law
- •Conclusions
- •2 Aims, objectives and benchmarks
- •Cork on principles
- •Visions of corporate insolvency law
- •Creditor wealth maximisation and the creditors’ bargain
- •A broad-based contractarian approach
- •The communitarian vision
- •The forum vision
- •The ethical vision
- •The multiple values/eclectic approach
- •The nature of measuring
- •An ‘explicit values’ approach to insolvency law
- •Conclusions
- •3 Insolvency and corporate borrowing
- •Creditors, borrowing and debtors
- •How to borrow
- •Security
- •Unsecured loans
- •Quasi-security
- •Third-party guarantees
- •Debtors and patterns of borrowing
- •Equity and security
- •Equity shares
- •Floating charges
- •Improving on security and full priority
- •The ‘new capitalism’ and the credit crisis
- •Conclusions
- •4 Corporate failure
- •What is failure?
- •Why companies fail
- •Internal factors
- •Mismanagement
- •External factors
- •Late payment of debts
- •Conclusions: failures and corporate insolvency law
- •5 Insolvency practitioners and turnaround professionals
- •Insolvency practitioners
- •The evolution of the administrative structure
- •Evaluating the structure
- •Expertise
- •Fairness
- •Accountability
- •Reforming IP regulation
- •Insolvency as a discrete profession
- •An independent regulatory agency
- •Departmental regulation
- •Fine-tuning profession-led regulation
- •Conclusions on insolvency practitioners
- •Turnaround professionals
- •Turnaround professionals and fairness
- •Expertise
- •Conclusions
- •6 Rescue
- •What is rescue?
- •Why rescue?
- •Informal and formal routes to rescue
- •The new focus on rescue
- •The philosophical change
- •Recasting the actors
- •Comparing approaches to rescue
- •Conclusions
- •7 Informal rescue
- •Who rescues?
- •The stages of informal rescue
- •Assessing the prospects
- •The alarm stage
- •The evaluation stage
- •Agreeing recovery plans
- •Implementing the rescue
- •Managerial and organisational reforms
- •Asset reductions
- •Cost reductions
- •Debt restructuring
- •Debt/equity conversions
- •Conclusions
- •8 Receivers and their role
- •The development of receivership
- •Processes, powers and duties: the Insolvency Act 1986 onwards
- •Expertise
- •Accountability and fairness
- •Revising receivership
- •Conclusions
- •9 Administration
- •The rise of administration
- •From the Insolvency Act 1986 to the Enterprise Act 2002
- •The Enterprise Act reforms and the new administration
- •Financial collateral arrangements
- •Preferential creditors, the prescribed part and the banks
- •Exiting from administration
- •Evaluating administration
- •Use, cost-effectiveness and returns to creditors
- •Responsiveness
- •Super-priority funding
- •Rethinking charges on book debts
- •Administrators’ expenses and rescue
- •The case for cram-down and supervised restructuring
- •Equity conversions
- •Expertise
- •Fairness and accountability
- •Conclusions
- •10 Pre-packaged administrations
- •The rise of the pre-pack
- •Advantages and concerns
- •Fairness and expertise
- •Accountability and transparency
- •Controlling the pre-pack
- •The ‘managerial’ solution: a matter of expertise
- •The professional ethics solution: expertise and fairness combined
- •The regulatory answer
- •Evaluating control strategies
- •Conclusions
- •11 Company arrangements
- •Schemes of arrangement under the Companies Act 2006 sections 895–901
- •Company Voluntary Arrangements
- •The small companies’ moratorium
- •Crown creditors and CVAs
- •The nominee’s scrutiny role
- •Rescue funding
- •Landlords, lessors of tools and utilities suppliers
- •Expertise
- •Accountability and fairness
- •Unfair prejudice
- •The approval majority for creditors’ meetings
- •The shareholders’ power to approve the CVA
- •Conclusions
- •12 Rethinking rescue
- •13 Gathering the assets: the role of liquidation
- •The voluntary liquidation process
- •Compulsory liquidation
- •Public interest liquidation
- •The concept of liquidation
- •Expertise
- •Accountability
- •Fairness
- •Avoidance of transactions
- •Preferences
- •Transactions at undervalue and transactions defrauding creditors
- •Fairness to group creditors
- •Conclusions
- •14 The pari passu principle
- •Exceptions to pari passu
- •Liquidation expenses and post-liquidation creditors
- •Preferential debts
- •Subordination
- •Deferred claims
- •Conclusions: rethinking exceptions to pari passu
- •15 Bypassing pari passu
- •Security
- •Retention of title and quasi-security
- •Trusts
- •The recognition of trusts
- •Advances for particular purposes
- •Consumer prepayments
- •Fairness
- •Alternatives to pari passu
- •Debts ranked chronologically
- •Debts ranked ethically
- •Debts ranked on size
- •Debts paid on policy grounds
- •Conclusions
- •16 Directors in troubled times
- •Accountability
- •Common law duties
- •When does the duty arise?
- •Statutory duties and liabilities
- •General duties
- •Fraudulent trading
- •Wrongful trading
- •‘Phoenix’ provisions
- •Transactions at undervalue, preferences and transactions defrauding creditors
- •Enforcement
- •Public interest liquidation
- •Expertise
- •Fairness
- •Conclusions
- •17 Employees in distress
- •Protections under the law
- •Expertise
- •Accountability
- •Fairness
- •Conclusions
- •18 Conclusion
- •Bibliography
- •Index
the roots of corporate insolvency law |
23 |
process has been completed, the company is dissolved: liquidators have no powers to carry on the company’s business except for the purpose of winding up.55 There are two routes to liquidating an insolvent company: a creditors’ voluntary liquidation and a compulsory liquidation.56 The former process involves a resolution of the shareholders to put the company into voluntary liquidation, followed by a creditors’ meeting to appoint a liquidator and establish a liquidation committee whose members are principally creditors’ representatives. The liquidation committee has a supervisory role over the liquidator, while he collects in and realises the company’s assets, ascertains claims, distributes dividends to creditors and investigates the causes of the company’s failure. The creditors’ voluntary liquidation is the most frequently used of the insolvency procedures.
Compulsory liquidation is liquidation by order of the court and is the only method by which a creditor can initiate winding up. A winding-up petition can be presented by a creditor, the directors, the company shareholders and, in certain circumstances, the Department of Trade and Industry (DTI). The petition to the court has to be based on one or more specific grounds stated in section 122 of the Insolvency Act 1986, including the inability of the company to pay its debts. If a winding-up order is made, the Official Receiver57 becomes liquidator, unless and until the creditors’ meeting appoints an insolvency practitioner in his place (i.e. if the company’s assets are sufficient to pay the liquidator’s remuneration and expenses). Generally compulsory liquidation is subjected to a greater degree of court control than a creditors’ voluntary liquidation, but in both methods interested parties can apply to the court to determine questions arising in the winding up or to confirm, reverse or nullify the liquidator’s decisions.
Formal arrangements with creditors
Companies in distress may be able to negotiate settlements on a variety of terms and such agreements may operate within a statutory format or informally and contractually between the company, its lenders and possibly even general creditors.58 These agreements may defer payments
55Insolvency Act 1986 Sch. 4, para. 5.
56Companies may also be wound up by the BERR or FSA in the public interest, e.g. to stop enterprises trading where they engage in practices that defraud customers and swindle the vulnerable: see ch. 13 below.
57The Official Receiver is not to be confused with a receiver or administrative receiver appointed by a secured creditor.
58See ch. 7 below.
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agendas and objectives |
or postpone collection (a moratorium); they may agree to pay sums less than those due (a composition); or to pay a designated sum where there is doubt about the quantum or enforceability of a claim (a compromise). Formal, statutory arrangements or compromises may be made principally under section 895 of the Companies Act 2006 and ‘compositions in satisfaction of [the company’s] debts or a scheme of arrangement of its affairs’, termed ‘company voluntary arrangements’ (CVAs), can be made under section 2 of the Insolvency Act 1986. (Arrangements by way of reconstruction can be undertaken by liquidators in a voluntary winding up under section 110 of the Insolvency Act 1986, while sections 165–7 and Schedule 4 of the Insolvency Act 1986 allow liquidators with the appropriate sanction to make compromises or arrangements with creditors but only according to creditors’ strict legal rights.)
Small and medium-sized companies may find a CVA useful, since it is generally less complex, time-consuming and costly than alternative procedures. CVAs under section 1 of the Insolvency Act 1986 cannot, however, be undertaken when the company is in winding up and, indeed, do not even require a company to be insolvent. The use of this option will depend on the company’s precise position and the attitude of its creditors. Using a CVA allows a company to reach an arrangement with its creditors under the supervision of an insolvency practitioner. The CVA must, however, be approved by requisite majorities at shareholder (50 per cent by value) and creditors’ (75 per cent by value) meetings and it does not bind creditors without notice of the meetings nor those with unliquidated/unascertained claims nor secured or preferential creditors without their agreement. The Insolvency Act 2000 introduced a moratorium of twenty-eight days into a CVA procedure for small companies.59 The effect of the moratorium is inter alia to offer a company protection against petitions for winding up or administration orders, winding-up resolutions, appointments of receivers and other steps to enforce security or repossess goods – though a moratorium cannot be filed for if an administration order is already in force, the company is being wound up or a receiver has been appointed.
Schemes of arrangement under the Companies Act 2006 s. 895 are an alternative formal method. Here the court sanctions a scheme duly approved by the requisite majority of creditors of each class at separately convened meetings, and once the scheme has been so approved, all the creditors are
59 See now Insolvency Act 1986 Sch. 1A and ch. 11 below.