In recent months we have seen in this jurisdiction a number of high profile Company failures that have caused great concern for unsecured creditors who are at risk of insolvency themselves as a result of a principle source of their income becoming threatened. In the case of companies, the main types of Insolvency procedure are Administration, Company Voluntary Arrangements or Liquidation.
The administration procedure is a way of facilitating a rescue of a company or the better realisation of its assets. It allows an insolvent company to continue to trade with protection from its creditors through a statutory moratorium. This moratorium prevents creditors from taking any legal action against the company or enforcing their security against the company or its property.
The main objective of administration is to rescue the company as a going concern. If this is not possible then the second objective is to achieve a better result for the company’s creditors than a winding up or liquidation of the company (without first being in administration). The third objective is to realise property to distribute the proceeds to the secured or preferential creditors. This only applies if the first two objectives are not possible and it will not unnecessarily harm the interests of the creditors as a whole.
An Administrator (who in all cases must be a licensed insolvency practitioner (“IP”)), can be appointed either by an out-of-court procedure or by a court order. An out-of-court appointment can only be made by the company through its directors or shareholders of by a qualifying floating charge holder. An application for a court order can be made by either the company, the company’s directors or one or more creditors of the company.
In all cases an Administrator cannot be appointed without first giving notice to the qualifying floating charge holder. In cases where the qualifying floating charge holder is making the appointment it must give notice to any person holding a prior ranking qualifying floating charge.
The Administrator is an agent of the company and an officer of the court. The Administrator has extensive powers to manage the affairs of the company and enforcement powers, such as bringing an application to court to challenge pre-insolvency transactions.
Company Voluntary Arrangement (“CVA”)
A CVA is a contractual agreement between a company and its unsecured creditors. The main aim of the CVA is to enable a company in financial difficulty to propose a compromise or arrangement with its creditors.
In most cases a CVA is commenced by the company’s directors however if the company is already in administration or liquidation it can be proposed by its administrator or liquidator.
The protection of a moratorium in respect of any action or proceedings against the company pending consideration of the CVA only applies in limited circumstances unlike in the case of an administration where there is a statutory moratorium applied automatically upon an administration order being made.
In order to have effect the CVA must be approved by at least 75% of the voting creditors who respond to the CVA supervisor’s invitation to vote on the proposal. At least 50% of those voting in favour must be unconnected with the company.
An approved CVA is supervised by a licensed IP and although the directors of the company remain in control they must fully cooperate with the IP to ensure implementation of the terms of the CVA. There is no impact on employees and the procedure does not interfere with the company’s ongoing business activities.
The approved CVA is a binding agreement between the company and all of its unsecured creditors and this includes unsecured creditors who did not vote and even those unsecured creditors who did not receive notice of the proposed CVA. An unsecured creditor without notice has 28 days to challenge the Arrangement and there are very limited grounds available for such a challenge.
The CVA is completed once the terms have been implemented and thereafter the company reverts back to its former status. If the CVA fails it is common for the Supervisor to have unsettled claims in the CVA allowing him to petition for the winding up of the company resulting in it being placed in liquidation.
Liquidation is used to wind up a company and realise and distribute its assets to creditors and shareholders. Liquidation of a company can be voluntary or compulsory.
Voluntary liquidation is initiated by a shareholders’ resolution to wind up the company. It can be started in relation to a solvent company (members’ voluntary liquidation (“MVL”)) or an insolvent company (creditors’ voluntary liquidation (“CVL”)). An MVL must be accompanied by a statutory declaration sworn by the directors that the company will be able to pay all of its debts, both settled and contingent, in full within 12 months of the start of the MVL. Resolutions for an MVL or CVL must be approved by 75% of the shareholders voting at the relevant shareholders’ meeting. At this meeting the shareholders will nominate a liquidator who, in the case of a CVL, must also be approved by the creditors.
Compulsory liquidation is initiated by the presentation of a winding up petition to the court by either the company, the company’s shareholders, the company’s directors or the company’s creditors.
Upon granting of the winding up order the Official Receiver (OR) automatically becomes the liquidator of the company. In cases where the company has assets that can be realised for the benefit of creditors it is normal that a licenced IP will be appointed by the OR to act as liquidator. In the case of a compulsory liquidation any action or legal proceedings against the company in liquidation cannot be initiated or continued without the leave of the court.