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1. Insolvency and restructuring procedures
1.1 – What are the main insolvency and restructuring procedures applicable to companies?
Administration – a flexible procedure that can be used to achieve a range of outcomes for a distressed company, from a restructuring to a liquidation of the company’s assets. It is frequently used in order to achieve a sale of the business of the company as a going concern (the terms of which have often been agreed in advance of the administrators being appointed, in which case it is known as a “pre-packaged” sale or “pre-pack”). In order to protect the business and preserve its value, the company is protected by a statutory moratorium whilst in administration. Administrators can be appointed out-of-court (that is, without the need for a court hearing) by the company itself, its directors or by a creditor holding a qualifying floating charge filing the requisite appointment documents at court; alternatively, an application for an administration order can be made to the court by the company, its directors, or by any creditor. Additionally, the following have standing to apply to court for an administration order: a liquidator of the company; the supervisor of a company voluntary arrangement; the Financial Conduct Authority and the Prudential Regulation Authority.
Liquidation – also referred to as “winding-up”, liquidation is a terminal process intended to facilitate the realization of the company’s assets, the fair assessment and payment of the claims of its creditors and, in the case of a solvent liquidation, the division of any surplus among the shareholders. It can be commenced by an order of the court (compulsory liquidation) – generally on the petition of a creditor – or by a resolution of the company’s shareholders (voluntary liquidation). A voluntary liquidation may be a “creditors’ voluntary liquidation” (generally insolvent) or “members’ voluntary liquidation” (solvent).
Moratorium – a “debtor in possession” procedure whereby the company is protected from action by its trade creditors for a short period, so as to allow time for restructuring proposals to be considered. The moratorium is available only to companies that are capable of rescue as a going concern, and lasts for an initial period of 20 business days (though this can be extended in several ways, for example by creditor consent or by the court). The moratorium is overseen by an insolvency practitioner known as a “monitor”.
Company Voluntary Arrangement – a CVA is a statutory compromise between a company and its creditors. The distressed company can propose an arrangement to its creditors, which will be binding on those creditors if approved by the relevant majority (75% by value including at least 50% of creditors unconnected with the company). Secured or preferential creditors cannot be bound without their consent. A creditor can apply to court to challenge a CVA that it considers to be unfair. CVAs may be used to avoid or supplement other insolvency procedures, such as administration or liquidation. The terms and effects of the CVA will vary from case to case, but they are frequently used by companies with large portfolios of leased properties (such as retailers) to restructure lease liabilities.
Scheme of Arrangement – like CVAs, schemes allow a proposal to be made to creditors, but they are also used to effect a wide range of other compromises and arrangements between the company and its creditors or shareholders. Unlike CVAs, schemes can bind secured creditors. The scheme is a company law rather than insolvency law mechanism, but provides a useful tool for corporate restructuring especially where there are dissenting creditors. Creditors or members whose interests are similar are divided into classes, and the scheme only becomes effective if approved by the relevant majority (at least 75% by value and 50% in number) of the members of each class.
Restructuring Plan – the restructuring plan procedure was introduced in 2020 as a new Part 26A of the Companies Act 2006. It is a procedure which is closely modelled on schemes of arrangement, with the key distinguishing feature that dissenting classes of creditors can be “crammed down”; this means that the plan can be imposed by the court on a class even if the class rejected it, in certain circumstances.
Receivership – allows secured creditors (eg lenders) of a company to appoint a receiver, who will then take possession of the secured assets of the company and seek to realize their value in order to discharge or reduce the debt owed to the secured creditor. The control of the receiver will be limited to the specific fixed assets over which he or she has been appointed – generally a property. The receiver will not control the company itself or its business. A company can simultaneously be in receivership and another form of insolvency (eg liquidation).
1.2 – Can a company obtain a moratorium whilst it prepares a restructuring plan? If so, what is the effect of the moratorium?
Yes: under legislation introduced in 2020, companies which meet the criteria can now use the freestanding moratorium process (described above). The effects of entry into a moratorium are that:
- the company has a “payment holiday” for most pre-moratorium debts (but must continue to pay the costs of continuing to trade during the moratorium and, amongst other debts, any sums due to banks or other lenders)
- the presentation of winding-up petitions and the appointment of administrators are prohibited, except by the directors (or, in the case of winding-up, on public interest grounds)
- except with the permission of the court:
- landlords cannot exercise rights of forfeiture
- creditors cannot enforce security, unless it relates to collateral arrangements or it was granted during the moratorium with the consent of the monitor
- no legal process can be commenced or continued against the company, except certain employment-related claims
- creditors cannot take action in respect of debts for which the company has a “payment holiday” or apply to the court for permission to do so
1.3 – How long will it generally take for a creditor to achieve the liquidation of an insolvent company, assuming an undisputed claim and no opposition from the company?
In most cases, between six and ten weeks (depending on whether the creditor serves a “statutory demand” so as to establish insolvency before presenting a winding-up petition, or simply presents a petition immediately).
1.4 – Does your jurisdiction make use of a distressed sale process by which the business/assets of the company can be sold?
Yes. A distressed sale of the business or assets of a company will generally take place through administration.
It is common for the preparations for the sale (eg identifying the purchaser and negotiating and drafting the sale documentation) to be undertaken before the commencement of the administration and the sale concluded immediately afterwards (usually without court or creditor approval, or even often knowledge). This is referred to as a “pre-packaged” or “pre-pack” sale. In a pre-pack, there will necessarily be limited marketing of the business/assets. The administrator is therefore responsible for ensuring that a fair price is obtained.
2. Insolvency office-holders and courts
2.1 – Who can act as an insolvency office-holder?
Office-holders must be licensed insolvency practitioners. They are generally accountants who have obtained a specialist insolvency qualification.
2.2 – Who decides the identity of the insolvency office-holder, and what restrictions apply?
This depends on the process:
- in an administration, the administrator will be chosen by the appointor
- in a voluntary liquidation, a liquidator will be appointed by the shareholders but – in the case of a creditors’ voluntary liquidation (“CVL”) – may be replaced by the creditors. Alternatively, where a CVL follows an administration, the former administrators will often act as liquidators
- in a compulsory liquidation, the court will appoint the Official Receiver (a civil servant) as liquidator. An alternative liquidator may then be appointed by the creditors
- in a moratorium, the monitor is chosen by the directors
- in a CVA, the supervisors will be nominated by the company
- in receivership, the receivers are chosen by the secured creditor which appoints them
Schemes of arrangement and restructuring plans do not require the involvement of an insolvency office-holder.
2.3 – Are insolvency cases heard by specialist judges, or in the general commercial courts?
Judges hearing insolvency cases will, generally, have specialist insolvency experience, though this is not an absolute prerequisite.
3. Position of directors
3.1 – To what extent do the directors of the company remain in control of its affairs during any of the procedures described above?
In an administration or liquidation the powers of the directors cease (unless permitted to continue through obtaining appropriate sanction), and the office-holder takes control of the company.
In a moratorium, CVA, scheme, or restructuring plan the directors remain in control of the company (although, in the case of a moratorium or CVA, subject to supervision by an insolvency practitioner).
Where a receiver has been appointed to specific assets of a company, the directors’ powers over those assets are effectively suspended. The directors do however remain in office and their powers over assets that are not the subject of the receivership are not affected.
3.2 – Are there circumstances in which directors are obliged to file for insolvency proceedings? If so, when do those circumstances arise?
Not absolutely. However, there will be circumstances in which continued operation of the company poses such a high risk of personal liability that the directors are effectively forced to file for insolvency, in order to protect themselves.
3.3 – What are the risks facing the directors of an insolvent company?
The chief risks of civil liability for directors are:
- wrongful trading (if they fail to take every step to minimize the losses to creditors, once they know or ought to know that the company cannot avoid insolvent liquidation or administration)
- breach of duty – in particular, if they fail to have regard to the interests of creditors at a point where:
- the company is insolvent or bordering on insolvency (or insolvency is imminent); or
- an insolvent liquidation or administration is probable.
In principle, directors can be held criminally liable for a number of insolvency-related offenses including fraudulent trading but, in practice, prosecutions are very rare.
Directors whose conduct indicates that they are unfit to be company directors can be disqualified from acting as such, or being involved in the management of a company, for a period of between two and fifteen years.
4. Position of creditors
4.1 – What are the main forms of security over movable and immovable property?
- fixed charges (including mortgages) – security over immovable property and specific movables (such as identified items of plant and machinery). Can also apply to intangibles (such as intellectual property rights)
- floating charges – flexible security which can apply to any class of asset, including a fluctuating set of movables (such as stock) (but which rank below certain unsecured debts and the expenses of the insolvency proceedings)
- liens/pledges – possessory security over tangible assets
4.2 – How does the opening of insolvency proceedings affect the rights of secured creditors?
In administration or a moratorium creditors (secured or otherwise) are prevented from taking enforcement action against the company or its assets, or commencing or continuing legal proceedings against it (although, in an administration, such action may be taken with the consent of the administrator or permission of the court). The rights of secured creditors are otherwise respected, as regards priority over unsecured creditors.
In general a creditor’s right to enforce its security is unaffected by a liquidation, and a secured creditor may proceed to realize its security provided that it does so outside any court proceedings.
4.3 – Where a debt owed to a secured creditor exceeds the value of the security, is the secured creditor entitled to claim for the shortfall?
Yes. A secured creditor which has realized its security may prove for the balance of its claim after deducting the amount realized. Furthermore, if a secured creditor voluntarily surrenders its security for the general benefit of creditors, it may prove for its whole debt as if it were unsecured.
4.4 – Which classes of creditor are given preferential status? Are any classes subordinated?
Preferential debts rank after debts secured by fixed charges and ahead of debts secured by floating charges. The main classes of preferential creditor are as follows:
- contributions to occupational pension schemes
- unpaid wages (up to a specified statutory maximum amount per employee)
- accrued holiday pay due to employees
- in the case of an insolvent company which provided services covered by the Financial Services Compensation Scheme certain sums owing to or covered by the Scheme
- certain tax debts owed by the company
Sums due to the shareholders of the company in their character as shareholders (eg in respect of dividends which have been declared but not paid) are subordinated to the claims of unsecured creditors.
4.5 – Is there a date by which creditors must make claims in the insolvency proceedings? If so, what are the consequences of failing to claim by that date?
There is no fixed time period in which claims must be filed.
Following the start of an insolvency, the office-holders will contact creditors and invite them to submit details of their claim (a process referred to as “proving” the claim, using a form referred to as a “proof of debt” or simply a “proof”). At first, the primary purpose of submitting a proof will generally be to allow for votes to be cast in a “decision process” within the insolvency (eg a vote on administrators’ proposals). Creditors are not obliged to submit a proof at this point, unless they wish to vote. If a creditor does not submit a proof, it will not lose the ability to do so in future.
At a later point, when they have funds available to make a distribution to creditors, the office-holders will set a “last date for proving” (or “bar date”), and notify creditors accordingly. If a creditor does not submit a proof before that date, it is likely to lose its right to participate in the distribution to which the bar date applies. However, it will not generally lose the chance to participate in future distributions, or to “catch up” – ie to be paid in respect of its claims up to the level of payment made in earlier distributions – if funds allow.
The position may be different in a CVA, scheme of arrangement, or restructuring plan, where the date for proving will generally be set in the proposal, scheme or plan document. Creditors should ensure that they submit their claim before any such date, in order to ensure that they are included in the process.
4.6 – Are contractual rights of set-off and/or netting effective in insolvency?
Yes. As a general rule, insolvency proceedings under English law may allow set-off without a contractual right, or may expand the scope of an existing set-off right, but will not deprive a creditor of set-off rights altogether.
The only significant exception to this general rule relates to multilateral set-off (ie contractual rights which provide for set-off between more than two parties). Such multilateral rights would be overridden by mandatory insolvency set-off in certain insolvencies (namely compulsory liquidation, “distributive administration”* and bankruptcy). Insolvency set-off applies only to “mutual” debts (ie those due between the same two parties, excluding claims acquired after the commencement of the insolvency), so that, if insolvency set-off applies, the set-off available to the counterparty would be limited those debts, whatever the terms of the contractual right.
* “Distributive administration” refers to an administration in which the administrator has been permitted by the court to make a distribution to creditors (thus engaging the rules applicable to distributions, including insolvency set-off). An administration will almost never start as a distributive administration, but may be converted at a later stage. Many administrations never become distributive.
4.7 – Are contract terms permitting termination of a contract by reason of insolvency (“ipso facto clauses”) effective?
Whether such clauses are effective depends on the nature of the contract and the role of the insolvent party under the contract.
Where a company is subject to insolvency proceedings, suppliers of goods and services to the insolvent company will be unable to rely on any provision in their contract which gives them the right to terminate the relevant contract or supply, or provide for the automatic termination of the relevant contract or supply, as a result of the insolvency. In addition, a supplier will not be entitled to terminate for a pre‑insolvency termination event, or to “ransom” the company for the supply of goods or services during the relevant insolvency procedure.
Note that this rule only applies to supplies of goods and services to an insolvent company. It does not apply to contracts that are not contracts for the supply of goods or services, or such contracts where the insolvent company is the supplier rather than the recipient.
4.8 – Are retention of title clauses enforceable and (if applicable) what are the main requirements for enforceability?
In principle yes, providing that the clause is incorporated into the contract between the parties and the goods in question can be identified. Retention of title can secure all monies due from the company to the supplier and is not limited to sums due under the particular order in question.
4.9 – Are foreign creditors treated equally to domestic creditors?
Yes.
5. Setting aside transactions
5.1 – What are the main transaction avoidance provisions applicable to the proceedings referred to above?
An insolvency office-holder can challenge:
- transactions at an undervalue (concluded in the two years prior to the commencement of insolvency proceedings)
- preferences (concluded in the six months prior to the commencement of insolvency proceedings, or two years where the preferred creditor is connected to the company)
- floating charges granted in respect of pre-existing indebtedness in the year prior to the commencement of insolvency proceedings (two years where the charge-holder is connected to the company)
- transactions defrauding creditors (no fixed time limit on bringing a challenge)
5.2 – Who is entitled to challenge transactions under these provisions?
Claims in respect of transactions at an undervalue, preferences and invalid floating charges may only be commenced by the insolvency office-holder or an assignee of the claims (following an assignment by the office-holder).
Claims for transactions defrauding creditors can be brought by the office-holder (or an assignee) or by a victim of the transaction. However, where the claim is brought by a victim of the transaction, relief will still generally be awarded to the company, rather than the specific victim (on the basis that the victim will be entitled to its share of the company’s recovery, together with other creditors).
6. Cross-border insolvency
6.1 – Do your courts recognize insolvency proceedings commenced in the courts of other jurisdictions?
Insolvency officeholders appointed in other jurisdictions can obtain recognition of proceedings under the Cross-Border Insolvency Regulations 2006 (which implements the UNCITRAL model law), under common law jurisdiction, or under section 426 Insolvency Act 1986.
Note, however, that judgments obtained in actions arising from insolvency proceedings (such as claw-back claims) will not generally be enforceable against a defendant in England unless the defendant has submitted to the foreign jurisdiction (eg by submitting a claim in the insolvency).
6.2 – If so, what assistance can your courts provide, following recognition?
There is a wide range of assistance that an English court can grant, and such assistance broadly extends to doing whatever the English court could have done in the case of an English insolvency proceeding (including enabling foreign creditors to gain access to property situated in England and Wales and restraining creditor action/proceedings in respect of the insolvent company), subject to judicial discretion.
6.3 – Is it possible to commence insolvency proceedings in relation to a foreign company?
Yes. The English courts have a broad jurisdiction to commence insolvency proceedings in relation to companies incorporated abroad.
7. Other matters
7.1 – Please consider whether there is any other feature of your country’s insolvency regime of which a lender, investor or purchasers of distressed debts or businesses should be aware? For example, are there any mistakes that foreign creditors often make?
As a general rule, English law is favorable to creditors, and the key principles are widely understood. In order to guard against potential mistakes made by foreign creditors, creditors should of course seek advice whenever required.
7.2 – Are there any other stakeholders or entities (eg governmental or regulatory) which may influence the outcome of any restructuring?
Where a debtor company has a “defined benefit” pension scheme, the trustees of the scheme and the Pension Protection Fund will generally be key stakeholders in any restructuring.
In the case of a regulated entity, the regulator (eg the Financial Conduct Authority) will need to be consulted.
HM Revenue and Customs (the UK tax authority) will be a major creditor in many insolvencies, and in some procedures (eg CVAs) may exercise a significant degree of control.
7.3 – Are there currently any proposals for significant reform of your insolvency laws?
Following the reforms introduced in 2020 (by the Corporate Insolvency and Governance Act 2020) there are now no significant proposals for reform.
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