Formal Insolvency

Lewis Business Recovery and Insolvency - Crisis & Recovery

Administration

Administration is a procedure available to a company that is insolvent, or is likely to become so, which places the company under the control of an insolvency practitioner and the protection of the court with the following objectives:

  • rescuing the company as a going concern
  • achieving a better result for the creditors as a whole than would be likely if the company were wound up without first being in administration; or, if the administrator thinks neither of these objectives is reasonably practicable
  • realising property in order to make a distribution to secured or preferential creditors.

While a company is in administration creditors are prevented from taking any actions against it except with the permission of the court or the administrator.

Reforms were introduced by the Enterprise Act 2002 to encourage the use of administration as the preferred vehicle for company and business rescue within formal insolvency.

An administrator may be appointed:

  • by an order of the court, on application by the company, its directors, one or more creditors, or, if it is in liquidation, its liquidator
  • without a court order, by direct appointment by the company, its directors or a creditor who holds comprehensive security of a type which qualifies to make such an appointment.

A secured creditor who is qualified to make an appointment may also intervene where the company has made an application to the court. This means that the secured creditor’s choice of administrator will prevail.

An administrator’s powers are very broad. They include powers to carry on the company’s business and realise its assets. The administrator displaces the company’s board of directors from its management function and has the power to remove or appoint directors. The administrator must prepare proposals for approval by the creditors setting out how he intends to achieve the purpose of administration.

There is a one year time limit within which the administration must be concluded, but this period can be extended with the agreement of the creditors or the permission of the court if more time is needed to achieve the purpose of administration. The administration may also come to an end if the administrator thinks the purpose of administration has been achieved or cannot be achieved.

On conclusion of an administration:

  • the company may be returned to the control of its directors and management
  • the company may go into liquidation (if there are funds to distribute to unsecured creditors)
  • the company may be dissolved (if there are no funds for distribution to unsecured creditors)
  • if a voluntary arrangement has been agreed during the administration, the arrangement may continue according to its terms. (It is possible for a voluntary arrangement to run concurrently with an administration).

Company Voluntary Arrangement (“CVA”)

A CVA is a procedure which enables a company to put a proposal to its creditors for a composition in satisfaction of its debts or a scheme of arrangement of its affairs. A composition is an agreement under which creditors agree to accept a certain sum of money in settlement of the debts due to them. The procedure is extremely flexible and the form which the voluntary arrangement takes will depend on the terms of the proposal agreed by the creditors. For example, a CVA may involve delayed or reduced payments of debt, capital restructuring or an orderly disposal of assets.

The proposed arrangement requires the approval of at least 75% in value of the creditors who choose to vote, and once approved is legally binding on the company and all its creditors, whether or not they voted in favour of it. There is limited involvement by the court, and the control would usually be retained by the company’s directors under the supervision of a licensed insolvency practitioner acting as a supervisor.

The CVA procedure was introduced by the Insolvency Act 1986 and was designed primarily as a mechanism for business rescue. The procedure is also often used instead of liquidation as a means of distributing funds on the conclusion of (and, occasionally, during) an administration.

Partnership Voluntary Arrangement (“PVA”)

A partnership can also propose a voluntary arrangement, although further consideration should be given to any impact on the partners, in the absence of any limited liability from the partnership.

Creditors Voluntary Liquidation (“CVL”)

CVL occurs where the shareholders, usually at the directors’ request, decide to put a company into liquidation because it is insolvent. A CVL is under the effective control of the creditors, who can appoint a liquidator of their choice. The CVL is the most common way for directors and shareholders to deal voluntarily with their company’s insolvency.

An insolvent voluntary liquidation is known as a ‘creditors’ voluntary liquidation’ because its conduct is primarily under the control of the creditors.

Compulsory Liquidation

Compulsory liquidation (or compulsory winding up) is instituted by an order made by the court, usually on the petition of a creditor, the company or a shareholder. There are a number of possible reasons for making a winding-up order. The most common is because the company is insolvent. Insolvency is usually established by failure to comply with a statutory demand requiring payment within 21 days, or by execution against the company’s goods being returned unsatisfied. A winding-up petition may also be presented by the Secretary of State for Trade and Industry on the grounds of public interest.

In a compulsory liquidation the function of liquidator is in most cases initially performed by an official called the official receiver. The official receiver is an officer of the court and a member of the Insolvency Service, an executive agency within the Department of Trade and Industry (DTI). In most compulsory liquidations, the official receiver becomes liquidator immediately on the making of the winding-up order. Where there are significant assets an insolvency practitioner will usually be appointed to act as liquidator in place of the official receiver, either at a meeting of creditors convened for the purpose or directly by the Secretary of State for Trade and Industry. Where an insolvency practitioner is not appointed the official receiver remains liquidator.

Where a compulsory liquidation follows immediately on an administration the court may appoint the former administrator to act as liquidator. In such cases, the official receiver does not become liquidator. An administrator may also subsequently act as liquidator in a creditors’ voluntary liquidation.

Members Voluntary Liquidation (“MVL”)

A solvent liquidation is known as a MVL, in which a liquidator is appointed by the shareholders and the company’s assets are sufficient to settle all its debts with 12 months. MVLs may be used for purposes of reorganisation, or in the case of owner-managed businesses to enable the shareholders to realise their interest in the company.

A solvent voluntary liquidation is known as a ‘members’ voluntary liquidation’ because its conduct is primarily under the control of its members.

Section 110 Scheme of Reconstruction

S110 of the Insolvency Act enables a liquidator to accept shares as consideration for assets, which can then be distributed in specie to members. It is commonly used for simplification of group structures or demergers.

The process also enables any dissenting shareholder interests to be paid.

Administrative Receivership

When a company breaches the terms of its borrowing from a creditor with a floating charge  over all or substantially all of the company’s assets, that creditor may appoint an administrative receiver (who must be a licensed insolvency practitioner) to recover the money it is owed. Many companies give such a charge to banks as security for their borrowing.

Administrative receivership is often referred to simply as ‘receivership’, and can only be applied where the floating charge was created on or before 15 September 2003 – therefore receivership is becoming a less commonly used process.