There are more formal options available to companies that for insolvent individuals. Since the introduction of the Enterprise Act 2002, there has been a strong emphasis on business rescue.
This is the company equivalent to bankruptcy. Its purpose is to realise all of the company’s assets, make distributions to creditors and prepare a report on the conduct of the directors. Liquidation can commence on a voluntary or compulsory basis.
Voluntary liquidation can be applied to both solvent (Members Voluntary Liquidation) and insolvent (Company Voluntary Liquidation) companies.
The main difference between these is the involvement of the creditors. Under a voluntary liquidation, all creditors are to be paid in full. Creditors have little input on the liquidation process. The emphasis is to maximise the return to shareholders.
When a company is insolvent, the emphasis switches to the creditors. They are entitled to much more input in the liquidation process. They can decide who will be the liquidator, how he is to be paid, and what costs can be incurred.
The liquidation process commences with the directors passing a resolution to call a meeting of the members and creditors.
The creditors’ meeting is often referred to as the Section 98 meeting, after the corresponding section in the Insolvency Act 1986. Creditors are entitled to attend the meeting, and are allowed the opportunity to ask a serving direct (who must attend the meeting) questions in respect of the company’s affairs.
Following the meetings, the liquidator is appointed and the directors powers cease.
Compulsory liquidations involve presenting a winding up petition to court. The petition can be presented by a creditor, the company on the basis that it cannot meet its debts, or if it is just and equitable that the company be wound up.
For a creditor to present a petition, it is usual to serve a statutory demand. However, it is possible to petition on the basis that the debt cannot be disputed on a substantial ground.
The petition must be served at the company’s registered office, and must be accompanied by an affidavit verifying the petition.
The petitioner is required to pay the court fee of £190 and official receiver’s deposit of £1,000.
When the petition is presented, this must be advertised in the London Gazette. This will usually result in the company’s bankers freezing the account rendering it practically impossible to continue trading.
In some cases, a provisional liquidator is appointed by the court. The appointment is made if there is concern that some of the company’s assets may be dissipated prior to the appointment of a liquidator.
Any transaction that the company enters into following the presentation of the petition is void unless ratified by the court.
There are three types of receivers:
- LPA receivers in respect of a property
- A court appointment from a holder of a floating charge debenture holder
- A court appointer receiver. This is rare.
LPA receivership is the favoured method for fixed charge holders to enforce their security. They can be appointed after mortgage money has become due.
The receivers’ actions are governed by the Law of Property Act 1925.
The power to sell can be exercised under the following conditions:
- Where there is a default of a loan for 3 months after a notice requiring it or
- Interest unpaid for 2 months after becoming due or
- Beach of deed or the LPA 1925.
The receiver’s powers are limited to collecting rent and income. The mortgage deed commonly gives the receiver the power to take possession of and sell the property.
LPA receivers do not need to be Insolvency Practitioners.
This form of receivership is very popular in the current economic climate with buy to let mortgage companies. If a landlord is made bankrupt, it is the official receivers’ policy to collect rent from the tenant, and not pass it to the mortgage holder. This will prompt the mortgagee to take action to take possession of the property. Appointing an LPA receiver is the mortgage company’s preferred route.
Administrative receivers can only be appointed by a Qualifying Floating Charge created before 15 September 2003.
The administrative has a wide range of power. The primary responsibility is to realise the assets covered by the floating charge.
Administration has become very popular since the introduction of the Enterprise Act 2002. As previously discussed administrative receivers can only be appointed for charges created before 15 September 2003. For those created afterwards, administration is the main way into corporate recovery.
Administration can be entered into very quickly by simply filing documents in court. There is even a provision for forms to be faxed to a designated number out of office hours.
Liquidation is often perceived as ‘pulling the plug’ on a company, whereas administration and company voluntary arrangements often has less reputational risk. This is often very important for public interest companies, for example Football Clubs.
The following is a list of football clubs that entered administration or CVA in the last 25 years:
Charlton 1984, Middlesbrough 1986, Tranmere 1987, Newport County 1989, Walsall 1990, Northampton 1992, Kettering 1992, Aldershot 1992, Maidstone 1992, Hartlepool 1994, Barnet 1994, Exeter 1994, 2003, Gillingham 1995, Doncaster 1997, Millwall 1997, Bournemouth 1997, 2008, Darlington 1997, 2009, Chester 1998, 2009, Hereford 1998, Portsmouth 1999, 2010, Crystal Palace 1999, 2010, Oxford Utd 1999, Barrow 1999, Swindon 2000, 2002, Scarborough 2000, Hull 2001, QPR 2001, Chesterfield 2001, Leicester 2002, Barnsley 2002, Carlisle 2002, Notts, County 2002, Bury 2002, Bradford 2002, Port Vale 2002, Lincoln City 2002, Swansea City 2002, York 2002, Halifax Town 2002, 2008, Derby 2003, Ipswich 2003, Huddersfield 2003, Oldham 2003, MK Dons 2003, Wimbledon 2003, Wrexham 2004, Cambridge 2005, Crawley Town 2006, Rotherham 2006, 2008, Leeds United 2007, Boston United 2007, Southampton 2008, Luton 2008, Stockport 2009, Salisbury 2009.
The administration must have one of the following three purposes:
- To rescue the company as a going concern
- To achieve a better result for the company as a whole that would be likely in a liquidation/li>
- To realise property in order to make a distribution to one or more secured creditors./li>
A person can be appointed as administrator by one of the following:
- By an order of the court
- By the holder of a floating charge holder
- By the company or its directors.
The application to court can be made by any of the following:
- The company
- The directors
- Justices chief executives for a magistrates court
- One or more creditors of the company
- The supervisor of a CVA
- Liquidator in a voluntary or compulsory liquidation
- Qualifying floating chargeholder.
An order will only be made if the court is satisfied that the company is or is likely to be unable to pay its debts, and the administration order is likely to achieve the purpose of the administration.
When a company enters administration a moratorium prevents secured and other duress creditors from exercising their rights against the company’s assets and prevents a winding up order being made against the company. It provides a breathing space for the administrator to put together a strategy to take the company forward.
There are a number of exit routes from administration:
- To hand the company back to the directors
- Petition the court for a compulsory winding up
- Place the company into creditors voluntary winding up
- Dissolve the company
- Propose a voluntary arrangement
- Automatic end after 12 months
- Termination when the objectives have been achieved
This procedure is widely used in insolvency circles. It involves an agreement to sell the company’s assets to a third party immediately after the appointment of the administrator. The assets are often sold to connected parties for example the company’s directors or a management buy-out.
The assets are often sold at a discount. The main criticism from creditors is that there is little or no marketing of the business, and there is a lack of transparency over the sale.
The purchaser has the advantage of buying the assets at a reduced price and be left with a business without unserviceable debt, toxic leases and other liabilities.
Pre-packs were often thought to be an abuse of the insolvency process. The company’s creditors would often be advised of the sale after it had taken place, resulting in there being little or no assets available for distribution by way of a dividend.
Those involved in pre-packs have argued that this method is the only way that the business could have been sold without negative publicity. The continuation of the business would provide a better result than if the company was wound up.
Research showed that in 92% of pre-pack sales, 100% of jobs were saved.
There are a number of high profile pre-pack administrations including the following:
- Cobra Beers, creditors were owed £71m following the sale
- Wittards, the company was sold for £21.5m
- Officers Club
- EMI, the company debts were reduced from £3.4bn to £1.2bn.
- The source of the administrator’s initial introduction
- The extent of the administrator’s involvement prior to appointment
- Any marketing activities conducted by the company and/or the administrator
- Any valuations obtained of the business or the underlying assets
- The alternative courses of action that were considered by the administrator, with an explanation of possible financial outcomes
- Why it was not appropriate to trade the business, and offer it for sale as a going concern, during the administration
- Details of requests made to potential funders to fund working capital requirements
- Whether efforts were made to consult with major creditors
- The date of the transaction
- Details of the assets involved and the nature of the transaction
- The consideration for the transaction, terms of payment, and any condition of the contract that could materially affect the consideration
- If the sale is part of a wider transaction, a description of the other aspects of the transaction
- The identity of the purchaser
- Any connection between the purchaser and the directors, shareholders or secured creditors of the company
- The names of any directors, or former directors, of the company who are involved in the management or ownership of the purchaser, or of any other entity into which any of the assets are transferred
- Whether any directors had given guarantees for amounts due from the company to a prior financier, and whether that financier is financing the new business
- Any options, buy-back arrangements or similar conditions attached to the contract of sale
Following much bad publicity on pre-packs, the insolvency regulators introduced a Statement of Insolvency Practice, which all insolvency practitioners need to comply.
In summary, Insolvency Practitioners are required to give full disclosure. The following information should be disclosed to creditors in all cases where there is a pre-packaged sale, as far as the administrator is aware after making appropriate enquiries: