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LPC Law Notes Business Law and Practice Notes

Corporate Insolvency Notes

Updated Corporate Insolvency Notes

Business Law and Practice Notes

Business Law and Practice

Approximately 649 pages

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Company Law – Private Limited Companies

Corporate Insolvency

Insolvency and enforcing a security

Key changes in the law

  • Insolvency Act 1986 [IA]

  • Enterprise Act 2002 [EA]

Fundamental changes:

  1. Promoting Administration

  2. Restricting Administrative Receivership

  3. Abolished ‘Crown Preferences’

  4. Ring Fencing [for recoveries under floating charges]

Key Date: 15th December 2003 [EA corporate Insolvency provisions came into force].
Insolvency

No definition provided within EA.

S.123 IA 1986 uses the phrase: ‘inability to pay debts’

When is a company unable to pay debts =

  1. The company has not paid, secured or compounded a claim for a sum due to a creditor exceeding 750 within three weeks of having been served with a written demand in the prescribed form [the statutory demand].

  2. An execution or judgment is unsatisfied

  3. It is proved to the satisfaction of the court that the company is unable to pay its debts as they fall due [the cash flow test]

  4. The value of the company’s assets is less than its liabilities, taking into account contingent and prospective liabilities [the balance sheet test].

Why is it important to determine whether company is insolvent or not?

  • Transactions may be open to challenge

  • It will determine whether a voluntary liquidation is controlled by its creditors or members

  • It impacts the duties of directors

  • Certain procedures require ‘Declaration of Solvency’ [e.g. buy back shares].

Insolvency practitioner = anyone acting as a liquidator, administrator, administrative receiver, supervisor of a voluntary arrangement or a trustee in bankruptcy must be a I.P.

S.389 IA: criminal offence to act as an I.P when not qualified to do so.
What can a lender do if borrower is in default?

It depends on whether the debt is secured or unsecured.

Secured Unsecured

  • Action for debt – court

  • Petition for winding up

  • Enforcement of security

  • Action for debt – court

  • Petition for winding up
How to enforce security

Five methods to consider:

  1. Possession

  2. Sale

  3. Foreclosure

  4. Appointment of receiver

  5. Appointment of administrator

Possession

Pledgee – already has possession

Legal Mortgagee entitled to take possession irrespective of default

Court can order possession

Precursor to sale
Sale

Pledgee can sell on default

Mortgage / charges – can sell asset pursuant to the security document
Foreclosure

Order by Court

Court brings end to the mortgagor’s equity of redemption mortgagee becomes absolute owner.
Appointment of receiver

Appointed by secured lender / creditor [pursuant to the rights under the security document]

Types of receivers:

  1. Receivers over specific assets

  2. Administrative receivers
Appointment of administrators Encouraged by EA 2002 reforms
Enforcing a floating charge

Recoveries of floating charges are subject to:

  1. Rights of preferential creditors;

Preferential debts: Defined Sch.6 IA 1986

  1. Ring fencing

S.176A IA 1986 [introduced by EA 2002]

Apply to floating charges created on / after 15th December 2003

Any liquidator, administrator or receiver shall set aside a prescribed part of the company’s net property for distribution to unsecured creditors.

[net property = the amount of property which (but for the ring fencing) would be available for the floating charge holder].

When will ring fencing apply?

R.F will not apply if:

  • The net property is less than the prescribed minimum [10,000]; AND

  • The liquidator / receiver thinks that the cost of making a distribution to unsecured creditors would be disproportionate to the benefits.
Qualified floating charge holders [QFCH] and their power to appoint administrative receiver.

Definition: a person holds a QFC if he holds security over the whole or substantially the whole of the company’s property (by way of QFC alone or by way of QFC together with other security)

What can a QFCH do?

Pursue out-of-court administration

He may be able to appoint an administrative receiver so long as FC was created BEFORE 15th September 2003.

If not a QFCH: not able to pursue out-of-court administration and cannot appoint an administrative receiver [but he can appoint a receiver].

Appointing Receivers / Administrative receivers

What is a receiver?

A neutral court officer.

Powers and duties will be set out in the court order under which he is appointed

Appointed to assist with financial difficulty in company / insolvency. BUT also can be appointed if there is some dispute within company [not always a financial problem].

Powers and duties of receivers:

Powers Duties

From security document

Administrative receivers have additional powers pursuant to IA 1986

To appoint administrator

Deemed to act as an agent of the company

Receivers appointed pursuant to a security document:

Express power to appoint Implied power

Receiver over a specific asset

Administrative receiver

 Is security document is by deed – S.101 LPA

Receiver over specific assets:

  • “Fixed charge receiver”

  • Appointed by holder of charge in relation to a fixed asset, in circumstances specified in security document

  • Receiver does not need to be an insolvency practitioner

  • Duties: manages, receiver income from, and can sell the assets subject to the charge, in order to discharge the debt owed to appointer.

  • NOT able to deal with other property.

Administrative receiver:

  • S.29(2)IA 1986 Definition: a receiver and manager of the whole (or substantially the whole) of a company’s property.

  • Who can appoint? QFCH created before 15th September 2003 [see definition above].

  • Replace directors in management of the company

  • Objective – to act for the benefit of the appointer. [Take possession of, and sell assets in order to repay appointer, and runs the business in the meantime].

  • No Moratorium

  • Appointment will crystallize the floating charge

  • Will often try to sell business as a going concern

  • Will repay appointer [but MUST pay any creditors with priority first (i.e. fixed charges over relevant...

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