- •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
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the quest for turnaround |
obstacles to stressed companies wishing to cram-down unwanted landlords in future.151
The approval majority for creditors’ meetings
The creditors’ approval majority is set out in Rule 1.19 of the Insolvency Rules 1986 and demands, as noted, that, to be effective, approvals must be given by a three-quarters majority in value of the creditors present in person or by proxy and voting on the resolution. This rule contrasts with the position for creditors of companies in administration, a simple majority by value of whom is required in order to agree restructuring proposals. The 75 per cent rule, said the DTI, was designed to encourage companies only to enter a moratorium if a successful rescue is likely and to provide an effective bar to unsound proposals being accepted.152 The requirement was also said to recognise that the decision of the meeting would affect the return to all creditors. In 1999 the IS suggested that a way to promote more use of CVAs would be to change the voting provisions so as to reduce the threshold for acceptance by creditors.153 Post-consultation, however, the IS doubted whether such a reform would be advisable. It was moved by the argument that lowering the threshold would not necessarily have any significant effect on acceptance levels; and that concerns would be aroused by binding creditors against their will by a simple majority.154
The shareholders’ power to approve the CVA
The argument that shareholders should not participate in the CVA approvals process through the company meeting can be represented thus: ‘The present rules require there to be a meeting of shareholders. This gives them a veto over any CVA. Given that they have no economic interest in the insolvent company, that is unjustifiable.’155 This criticism of shareholder voting contrasts with the approach put forward by the DTI in 1995.156 The Department argued that shareholders were not usually deprived of their shares when a CVA was proposed and that they should, therefore, have a right to receive information about the CVA and vote on it with or without modifications. The DTI considered,
151See Chalkiadis, ‘Powerhouse’, p. 4: ‘All that is needed is some more detailed thought and some careful drafting.’ Thus landlords are likely, inter alia, to revisit the security of leases being granted and to seek to strengthen that security for the future: see further Verrill and Elliot, ‘Reflections on the Powerhouse Case’, p. 29.
152DTI 1995, p. 15. 153 IS 1999, p. 11. 154 IS 2000, p. 36.
155 Phillips, Administration Procedure, p. 24. 156 DTI 1995, p. 16.
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however, that the decisions of shareholders should not prevail over those of the creditors unless they could show to the court that they were being unfairly prejudiced. The reasoning here was that shareholders should not have any say in whether a CVA was accepted if they did not have a demonstrable financial interest at the time. The proposal was thus akin to the situation in a liquidation: ‘If the company is insolvent the shareholders are in no worse position than if the company were to go into insolvent liquidation rather than enter into a CVA. If, however, the company is saved, their shares may begin to reflect real worth.’157 The proposal to allow the shareholders to go to court on grounds of unfair prejudice was designed to allow shareholders’ positions to be taken into account when there was an interest that was being unfairly affected.
The DTI view is preferable to the ‘no economic interest’ approach in so far as it is difficult to deny the actual and potential interest of a shareholder in the CVA.158 This is a procedure that does not necessarily commence with the company’s insolvency: the directors can propose a CVA prior to insolvency (when shareholders still possess valid interests). What the insolvency legislation does is to provide that a decision to approve a CVA is effective if taken by both the creditors’ and company meetings or the creditors’ meeting on its own.159 Where a CVA is approved, it has effect as if made by the company at the creditors’ meeting but where a decision of the creditors’ meeting differs from one taken by the company meeting, a member of the company can apply to the court which may either order the decision of the company rather than the creditors to have effect or make such order as the court thinks fit.160 A person entitled to vote at either a creditors’ or a company meeting has, as noted, power to challenge a decision in court on the grounds of unfair prejudice or that there has been a material irregularity at either meeting.161 If the court is satisfied on the ‘unfair prejudice’ or ‘material irregularity’ grounds, it is given powers of revocation, suspension or direction.162 Provisions, accordingly, give primacy to the creditors’ meeting but do
157Ibid., p. 16.
158On the economic interests of junior creditors in a s. 895 CA 2006 scheme of arrangement see pp. 480–1 above and Mann J in Re My Travel Group plc [2005] 1 WLR 2365. (The Court of Appeal in Re My Travel Group plc [2005] 2 BCLC 123 deemed that Mann J had not, in fact, needed to determine the economic interest issue because the only issue was whether the meetings of creditors with whom My Travel intended to make an arrangement had been properly constituted, which they had been.)
159Insolvency Act 1986 Sch. A1, para. 36(2).
160Ibid., para. 36. See also IA 1986 s. 5 regarding non-moratorium CVAs.
161Insolvency Act 1986 Sch. A1, para. 38. 162 Ibid.