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Maximising Assets On Insolvency Notes

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W2 - MAXIMISING ASSETS ON INSOLVENCY Co = company MA = model articles TA = table articles OUTCOME 1 - Advise on the options available to a secured creditor of a co which is in financial difficulty Options on insolvency (Creditor related) Fixed charge holders

LPA Receivership

By power in security document - or if none then by LPA ss 101-109

CVA (creditors voluntary arrangement)

Formal agreements which have been sanctioned by the court but allow the company to continue trading

Wait for another party to put co into liquidation Informal agreement

Might agree to extended credit terms, reduced payments, or payment by instalments - Disadvantage is if company breaches agreement, it is no longer binding on creditors

Scheme of arrangement

Floating charge holders post15.09.03 (n/b pre would have had administrative receiver option)

Liquidation

BUT it can only prove in the bankruptcy for an unsecured balance after the sale of the asset subject to the fixed charge

Administrator (possibly with CVA as below)

Out of court route

CVA Scheme of arrangement Wait for another party to put co. into liquidation Informal agreement

Unsecured creditors

Liquidation

Serve statutory demand (IA 1986 s 123(1)(a) or sue the company under s 123(1)(b).

Administrator

COURT ROUTE ONLY

Suggest a CVA Informal agreement Directors

Administrator Liquidation CVA

Out of court route OR court route

RECEIVERSHIP: OPTIONS FOR SECURED CREDITORS ONLY - insolvency unnecessary Appointing a LPA receiver - FIXED CHARGE HOLDER (ss.28-49 IA 1986) When do you need this?

Enforcing any fixed security taken over the company's property.

Duty of the Receiver

Solely for the charge holder to recover money owed to them (case law)

Traditionally appointed under LPA (s.109) but now usually express power in security doc. (also sets out duties and powers of the receiver) - creditor able to appoint in event of default.

On appointment the Receiver:
 Takes possession of the charged asset and deals with it solely for the chargeholder
 Sells asset
 Pays expenses
 Repays fixed charge holder
 If shortfall - claimed as unsecured debt from company
 If exceeds proceeds - return remaining money to company.
 After this has been done the Receiver has no further interest in the company (though if he is appointed under a floating charge, he does have a duty to pay preferential creditors (IA86 s 40)

Advanta Advantages Disadvantages ges/disa • Quick realisation of

• LPA receiver pays outstanding expenses including dvantag amount secured receivership fees first es from • No notice required

• If asset has gone down in value, the amount secured may client's • Duty to charge holder not be recovered in full and the shortfall will be claimed point of as an unsecured creditor only (as opposed to view administration

• The company may find it very difficult to trade after this, where duty to all especially if it loses its premises - so if there are other creditors equally) amounts outstanding this could jeopardise ability to recover those What does the security documen t say?

Prima facie the lender has the powers given to it under s 101 LPA 1925, which only discusses income. s101(3) LPA allows it to extend its powers by mortgage deed 
need to do this in order to cover all assets. The prep task SD does this: Power to appoint: Cl 15.1 of the example document: lender may appoint a receiver in writing signed by an officer or manager or other authorised person/by deed: (a) when requested by Chargor i.e. borrower; (b) when any action is taken to put co. into administration; (c) when an Enforcement Event is continuing. NB: "Enforcement Event" = Event of Default (cl 1.1). "Event of Default" = (i) failure to make any payment when due (ii) breach of covenant, warranty or undertaking (iii)

commencement of insolvency proceedings (Facility Agreement) Notice required: None: Cl 14.3 excludes the application of s 103 LPA to the deed (s.103 requires lender to serve notice on borrower) Cl 15.1 reiterates that no notice is required Powers of the receiver: The receiver is the agent of the company and must apply the proceeds to the discharge of the debt (s 109 LPA; cl 15.4) Schedule 1 of the document extends the powers that the receiver has under s 101 LPA - and they are very broad. Key power given: to take possession and realise capital. Under s 101(1)(iii), can only appoint a receiver to receive income - the chargee itself has to take possession to realise capital under the LPA

Appointing an administrative receiver (also ss.28-49 and 72A) - FLOATING CHARGE HOLDER pre 15.09.2003 When do you need this?

Enforcing a floating charge granted before 15 September 2003. Better option than appointing an administrator - as powers v. broad Administrative receivers may be appointed under IA86 s 29 by a floating charge holder who has a FC over the company's undertaking. But through the Enterprise Act 2002, this can only be done for floating charges created before 15 September 2003 -> now must use administration.

Duty of the administrative receiver

Duty of the administrative receiver Only to the floating charge holder: as opposed administrator owes duty to all creditors

Adv/dis from client's point of view

Advantages Disadvantages Administrative receiver has very • Charge must have been granted before 15 broad powers September 2003 otherwise can't use Only owes duty to chargee - not • Charge has to be over whole/substantially to others (cf. administration) whole of co's assets

What does the security document say?

Loan document will specify events to trigger appointment, might include:
 Failure to meet a demand to pay capital or interest;
 Presentation of a winding-up petition;
 Presentation of a petition for administration or a CVA;
 Levying of distress or execution against the company's assets;
 Failure to comply with restrictions in the loan documentation, e.g. by granting a new charge over assets;
 The company ceasing to trade;
 The assets being in jeopardy; or
 The inability of the company to pay its debts.

Requirements

The charge must be over the whole, or substantially the whole of the company's property and must be a floating charge (s 29(2)(a)) The charge must have been created before 15 September 2003 (s 72A) - since that time s 72A has excluded the availability of administrative receivers to qualifying floating charge holders.

Powers of the

S 42(1) - the administrative receiver has the powers set out in Sch 1

admin receiver

Sch 1 powers (p 1387 SB) are very broad Essentially takes over the running of the co, purely with view to selling the charged assets, paying his costs and repaying charge holder. Then will resign. Relevant leg = IA ss.42 -49 (powers, liability, requirement to give report etc)

Effect of administrative receivership

Effect In theory, once receiver has completed his work, he returns the company to the management of the directors who may continue to run the business. In practice, receivership is frequently followed by liquidation as there are few assets left once the chargeholder has been paid.

Appointing an administrator - Schedule B1 IA 1986 Revised regime implemented on 15 September 2003 to replace 'AR' for those charges that come into existence on or after this date. When do you need this?

Co. is in financial difficulties and these are likely due to executive incompetence rather than external matters - you then effectively replace them with the administrator who tries to rescue the co. or at least improve the situation. IF difficulties arise due to external pressures on the co. - e.g. one of its main customers has gone bust, then consider alternative methods - it would probably not be cost effective to appoint an administrator when you could enter into a CVA, etc.

What is an administrator
?

Para 1(1) Schedule B1 Insolvency Act 1986: a person appointed to manage the company's affairs, business and property. Para 6: He must be a qualified insolvency practitioner.

What is his role?

Para 59: to manage the company and rescue it Administrator must follow the hierarchy of aims (IA 86, Sch B1, Para 3(1)): a) Rescue the company as a going concern; or b) Achieve best result for the company's creditors as a whole than would be likely if the company were wound up; or c) Realising property in order to make a distribution to one or more of the preferential creditors. Para 3(2): must act in the interests of the creditors as a whole. Para 3(3): Must start by aiming for objective (a) and move down the list only if the alternative is not reasonably practicable, or if options (b) or (c) is better for the creditors as a whole or will not unnecessarily harm them Para 4: carry out his functions as quickly and efficiently as reasonably practicable.

Advantages/d isadvantages from client's point of view

Advantages

• Can combine with a CVA to cap the level of debt

• Options very broad - could include layoffs, sell premises and lease back, realise assets

Disadvantages

• Duty is owed to the creditors as a whole (Para 3(2)) (cf receivership/administrative

etc. Effect of administratio n

receivership)

Creates statutory moratorium Paras 42 & 43
 Prevents winding up petition commencing
 Lasts throughout the administration
 Restricts the ability of third parties to enforce their rights without the consent of the administrators
 Gives administrator vital breathing space to assess state of the company finances and investigate the possibility of the selling the company as a going concern and thus protecting sum or all of the employees jobs. Administrator runs company - D's powers cease. Normally lasts 1 year. Court can extend.

What does the law/security document say?
Who can appoint?
QUALIFYING FLOATING CHARGE HOLDER - OUT OF COURT What is a qualifying floating charge?
 States that IA86 Sch B1 Para 14 applies to it; and
 Purports to empower the holder of the floating charge to appoint an administrator of the company;
 Or:
 Purports to empwer the holder of the charge to make an appointment which would be the appointment of an administrative receiver within the meaning given by s 29(2) IA86; and
 A QFC (qualifying floating charge) which, on its own or with other QFCs held by the same lender, relates to the whole, or substantially the whole, of the company's property (para 14(3)) Ability to appoint an administrator Only if a floating charge: IA86, Sch B1, Para 14(1) To be qualifying the floating charge must (Sch B1, Para 14(2)):

• Be stated in the instrument to be a floating charge (Cl 4.2(a) does this)

• Purport to empower the holder to appoint (Cl 4.2(b) does this) The lender must have a floating charge over the whole or substantially the whole of the company's property: Sch B1, Para 14(3)(a) This may be several charges that together cover the whole/substantially the whole: Sch B1, Para 14(3)(b)-(c) If an administrator, administrative receiver or liquidator has already been appointed, an administrator cannot be appointed by a QFCH (Para 14) Notice Give at least two business days' notice to all PRIOR qualifying floating charge holders: Sch B1, Para 15(1) - interim moratorium whilst prior QFC deliberated his options Sch B1 para 18:
- Notice to court + statutory declaration by person who makes appoint +
administrator

How to appoint the administrator

• File a notice of appointment with the court, identifying the administrator, and including a statutory declaration that: o The chargee is a QFC in respect of the co's property o The charge is enforceable at the date of the appointment o The appointment is in accordance with IA86, Sch B1

• It should be accompanied by a statement by administrator that: o He/she consents o In his/her opinion the purpose of the administration is likely to be achieved o Other info/opinions as may be prescribed by the court COMPANY/DIRECTORS - OUT OF COURT Ability to appoint an administrator Company: ability under Sch B1, Para 22(1) Directors: ability under Sch B1, Para 22(2) UNLESS:

• A winding up petition is ongoing (Para 25(a))

• An administration application has already been made (Para 25(b))

• An administrative receiver of the co. is in office (Para 25(c)) Directors must hold board meeting; Company must hold GM to approve Notice Give at least five business days' notice to (Para 26):

• Any person who may be entitled to appoint an administrative receiver (Para 26(1)(a))

• Any QFC (Para 26(1)(b)); and

• the court Also file at the court:

• Any notice filed under the above (Para 27(1)(a))

• Statutory declaration that: o (i) the co is or is likely to become unable to pay its debts; o (ii) that it is not in liquidation; and that, o (iii) as far as the person making the statement is able to ascertain, the appointment is not prevented due to an administration having taken place in the previous 12 months (Para 27(2)) How to appoint the administrator

• If dirs appoint, need to pass a board resolution.

• File a notice of appointment with the court, identifying the administrator, and including the statutory declaration above.

• It should be accompanied by a statement by administrator that: o He/she consents o In his/her opinion the purpose of the administration is likely to be achieved o Other info/opinions as may be prescribed by the court COURT APPOINTMENT
[this is very likely to be used by creditors who are not QFCHs]
Ability to appoint an administrator IA 86, Sch B1, Paras 10; 13(1)(a) Application may be made by:

• The company

• Directors of the co.

• One or more creditors of co. (Para 12(1)(a)-(c)) What must prove to court

• That the co. is or is likely to become unable to pay its debts (defined in IA86, s123); AND

• The administration order is reasonably likely to achieve the purpose of the administration (Para 11(a)-(b)) Notice Give notice as soon as reasonably practicable after the application to:

• Any person who has appointed an administrative receiver

• Any person who is or may be entitled to appoint an administrative receiver

• Any QFCH (qualifying floating charge holder) (Para 12(2))

• Any such other persons as prescribed by Insolvency Rules 1986 Orders the court can make

• Administration order

• Dismiss application

• Adjourn hearing conditionally or unconditionally

• Interim order

• Treat the application as a winding-up petition and make any order the court could make under IA 86 s 125 (powers of court on hearing winding up petition)

• Any other order which the court thinks appropriate Administrati on process

Administration begins - which means the moratorium comes into effect protecting the company whilst the administration attempts a rescue

Administrator puts forward proposals at creditors' meeting o Creditors can seek further details or may amend the proposals (IA86 Sch B1, para 53(1)(b)) o Should take this into consideration because the directors may have appointed the administrator which means the creditors may not to be happy to have him there

Initial creditors meeting may be dispensed with (IA86, Sch B1, para 52), if:
 Creditors are likely to be paid in full
 Unsecured creditors are unlikely to be paid at all; or
 Only the option of realising property in order to make a distribution to one or more secured or preferential creditors (Sch B1, para 3(1)) applies Administrator required to convene further meetings with the creditors if the court orders him to do so, or if creditors holding 10% request it. Effect of administration order are that:
 Company is managed by the administrator;
 Directors' powers cease, though they are still in office;
 Moratorium continues;
 Administrator controls the company's assets (but does not own them); and
 Administrator carries out his proposals which have been approved by the creditors. NB. The creditors can establish a creditors' committee under para 57 Powers and duties of an administrator

Administrator has statutory powers under IA86, Sch B1, for example to:
 Remove and appoint directors (para 61);

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