#16690 - Administration - Debt Restructuring

Recall that the tragedy of the anti-commons = need for collectivisation for privatisation.

• Collectivisation = Administration + Chapter 11 USC

• Privatisation = Pre-packs + Schemes of arrangement

The procedures available under English law:

• Compulsory winding up by court order

• Creditors’ voluntary winding up

• Administration (whether by court order or taking place out-of-court)

• Company Voluntary Arrangements (“CVAs”)

• Schemes of Arrangement

• Bankruptcy

McCarthy & Stone:

• McCarthy & Stone’s capital structure:
  

  • ILNH = Holders of the investor loan notes

• Scheme of arrangement + Pre-pack:
  

  • Scheme of arrangement involving only the senior creditors. Senior creditors received equity and new debt in HoldCo.

  • Pre-packaged administration:

    • Transfer of all assets to the new companies in consideration for the assumption of trading liabilities by the new companies.

    • Discharge of part of the senior debt by way of issuing new debt and equity in the new companies.

    • Release of all security and guarantees over the transferred assets.

    • This effectively leaves behind out-of-money creditors in the original companies. The original companies are now essentially shells devoid of assets.

Bluebrook:

• Bluebrook’s capital structure:
  

• Three identical schemes of arrangement:
  

  • Three identical schemes for Bluebrook, IMO, and Spirecove.

    • The scheme creditors receive equity in HoldCo + new debt issued by MidCo.

    • The companies in red were put into administration.

    • This were pre-packaged administrations: The transfer of assets took place immediately upon the appointment of the administrators.

Hellas II:

• Hellas II’s capital structure:
  

• Schemes of arrangements + Pre-pack:
  

  • Hellas V:

    • Scheme of arrangement, wherein the super-senior floating-rate notes were swapped for new equity in BidCo.

    • BidCo acquired Wind Hellas.

  • WFIII:

    • Pre-packaged administration, involving an enforcement sale of Wind Hellas by the security trustee to BidCo.

  • Hellas III, IV, V, and VI:

    • Pre-packaged administrations to transfer the inter-company debt owed by Wind Hellas to BidCo.

Administration:

• The transfer of assets requires a release of the security interests over the assets. This is problematic because even second lien and mezzanine creditors can sometimes also be secured. Administration is thus because since the administrator has wide-ranging powers to dispose of the company’s assets regardless of any security interests.

• Administration as a temporary holding mechanism.

  • Comprehensive moratorium comes into play.

  • The company’s existing managers are replaced by external managers.

  • The aim here is to recuse the company as a going concern, for the benefit of all creditors.

• Can occur both out-of-court or by court order.

  • Administration used to be only available via court order under the Insolvency Act 1986.

  • Out-of-court administration was later introduced by the Insolvency Act 2002.

• Administration as a substitute for administrative receivership.

  • Administrative receivership is primarily about liquidating the company.

  • Administration further promotes the “rescue culture”. The foremost goal of administration is the rescue of the company as a going concern.

Initiating the administration process:

• Administration by court order:

  • Who can apply to court? The company itself, its directors, or one or more of the company’s creditors.

  • The order will be made if the company is, or is likely to become, unable to pay its debts.

    • This requirement is unnecessary if the creditor applying to court is the holder of a qualifying floating charge (“HQFC”) over substantially all of the company’s assets.

    • The precise definition HQFC is set out in paragraph 14(2)(3).

  • It must also be reasonably likely that the purpose of administration — i.e. the rescue of the business of the company as a going concern — will be achieved.

    • N.b. The company itself is really just a legal fiction. A new company can be set up within a matter of minutes.

    • The most important thing that is of value here is the business that the company has built.

• Out-of-court administration:

  • The company itself or its directors chooses to appoint an administrator.

  • Notice must be given to the HQFC of the company’s intention to appoint an administrator. The HQFC must be given a certain number of days before the appointment actually occurs. This is to give him an opportunity to challenge the appointment of an administrator.

    • N.b. The challenges that have been mounted thus far have generally been unsuccessful.

  • Notice must also be given to the court when the administrator is actually appointed.

    • The court simply chucks the notice in a cupboard, only taking it out if the HQFC decides to mount a challenge.

The moratorium:

• Interim moratorium:

  • For administrations by court order, the interim moratorium comes into place as soon as the application is made.

  • For out-of-court administrations, this comes into place as soon as the notice of intention to appoint an administrator is filed to the court.

  • N.b. The substance of interim moratoriums are pretty much the same as that of statutory moratoriums.

• The statutory moratorium (which is given at the court’s discretion) stays:

  • Resolutions, petitions, and orders to wind up the company;

  • The appointment of an administrative receiver;

  • Any legal process to enforce a claim against the property of the company;

  • The enforcement of any security interest against the company; and

  • The repossession of goods delivered under hire-purchase, conditional sales, or retention of title arrangements.

• No steps may be taken to enforce any security over the company’s property except with the administrator’s consent or the court’s permission.

  • “Security” = Security interests proper

    • Mortgages

    • Pledges

    • Charges

    • Liens

  • “Steps” = Legal proceedings, repossession, sale, and preparatory acts.

  • “Property” = All properties tangible or intangible, real or personal.

• And no steps may be taken to repossess goods delivered under any hire-purchase agreement.

  • Hire-purchases: The buyer has an option to purchase the goods at the end of the contract.

  • Conditional sales: Title to the goods passes automatically to the buyer at the end of the contract.

  • Chattel leasing: There is neither an obligation nor an option.

  • Retention of title: Title to the goods does not pass to the buyer until payment of the purchase price in full.

• Atlantic Computer Systems Ltd: When will the court grant leave (i.e. an exception to the moratorium)?

  • The applicant has to make a case.

  • Leave shall be granted if it is unlikely to affect the purpose of administration.

  • Otherwise, the court must balance the legitimate interests of the parties.

  • In doing so, great weight will be given to the proprietary interests of secured creditors.

  • This is especially so significant loss will be caused to secured creditors by a refusal to grant leave. In these instances, leave ought to be granted.

  • The overall financial position of the company will also be taken into account.

Control:

• The administrator takes control over the company.

• The administrator must be a qualified insolvency practitioner. This typically means accountants.

• The administrator has full management powers.

• The administrator acts as an agent of the company.

• The administrator is also an officer of the court. This brings with it additional duties.

• The powers held by the company and its officers rest to the extent that they could be exercised so as to interfere with the administrator’s powers.

• “Light-touch administration” = The day-to-day running of the company’s business is left in the hands of the directors.

• The wide powers of the administrator:

  • To do anything necessary or expedient for the management of the affairs, business, and property of the company.

  • To remove and to appoint directors.

  • To call a meeting of members or creditors.

  • To apply to court for directions.

  • To make a distribution to secured and preferential creditors, and, with court approval, to unsecured creditors.

  • To dispose of property subject to a floating charge.

  • To dispose of property subject to security interests with the court approval.

The administrator’s proposals:

• The administrator is supposed to come up with proposals for achieving the purposes of administration.

• He must send a copy of his proposal to the companies registrar and to every creditor and member of whose address the administrator is aware

• The proposal is to be sent out as soon as is reasonably practicable after the company enters administration, and, in any event, no more than 8 weeks after the company enters administration.

• The administrator must seek a decision from the creditors within 10 weeks of the company entering administration.

• The approval of the creditors can come with or without modifications. Modifications require the administrator’s consent.

• Voting (if the proposal is not a CVA or a scheme): Who does it involve?

  • Details of the debt must be provided to administrator no later than on the decision date.

  • Votes are calculated according to the outstanding amount as of the date of commencement, taking into account payments and set-off.

  • Secured creditor vote only in respect of the balance (which is calculated by the nominal value of debt – value of his security (as estimated by him)).

  • Claims are admitted for voting by the convener.

  • Debt-holders with debts of unliquidated amounts or of uncertain value do...