Corporate bankruptcy under the UK law Vinod Kothari 1012 Krishna 224 AJC Bose Road Calcutta 700 017 Phone 033-23233863/23233864/2281 1276/22817715/22813742.

Corporate bankruptcy under the UK law

Vinod Kothari1012 Krishna224 AJC Bose RoadCalcutta 700 017Phone 033-23233863/23233864/2281 1276/22817715/22813742Fax 91-33-23233863/22811276

Email: [email protected]; [email protected]

Corporate insolvency by Vinod Kothari2

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Brief legislative history UK corporate bankruptcy laws

Provisions contained in Insolvency Act 1986:– Prior to enactment of Insolvency Act, the Bankruptcy Act 1914

did not apply to corporate insolvency– Corporate insolvency provisions were contained in the

Companies Act, including CA 1985– Kenneth Cork Committee (Insolvency Law Review Committee)

recommended spin off and enactment of Insolvency Act 1985– The 1985 Act on the very first day replaced by Insolvency Act

1986– Substantially amended by Insolvency Act 1994– Further substantially amended by Enterprise Act 2002


General scheme of bankruptcy resolution under UK law

Companies voluntary arrangement (cva):– Not exactly a bankruptcy proceeding, since it is not necessary for the company to be

insolvent– No stay on creditors’ action

Administrative receivership:– Formerly known as receivers and managers, or receiver– Appointed by debentureholders having floating charge over substantially the whole of the

company’s property– Not applicable to unincorporated bodies

Administration:– A watered down version of Chapter 11 of the US law; moratorium allowed by creditors to

allow the company to restructure– Based on recommendations of the Cork Committee– Covered by Part I of the Insolvency Act

Winding up or liquidation:– A process of realisation of the assets and their distribution to put the company to an end

Compromises,composition and arrangement:– Voluntary compromises and arrangements:

Sec 425 of the CA 1985, Company voluntary arrangement under Part I of the IA 1986, etc

Reorganisations, that is, the workouts carried outside of the law


Data of various filings under the IA 1986

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998

CompulsoryLiquidations

4116 3667 4020 5977 8368 9734 8244 6597 5519 5080 4735 5216

Creditors VoluntaryLiquidations

7323 5760 6436 9074 13459 14691 12464 10131 9017 8381 7875 7987

AdministrativeReceiverships

1265 1094 1706 4318 7515 8324 5362 3877 3226 2701 1837 1713

AdministratorAppointments

131 198 135 211 206 179 112 159 163 210 196 338

VoluntaryArrangements

21 47 43 58 137 76 134 264 372 459 629 470


Scheme of sections

Part I to VII deal with corporate bankruptcies:– Part I corporate voluntary arrangements [sections 1-7]– Part II Administration [Sections 8-12]– Part III Receivership– Part IV winding up– Part V winding of unregistered companies– Part VI Miscellaneous provisions– Part VII Interpretation applicable first parts

Part VIII to IX deal with individual insolvency Part XII to XIX deal with matters common to both

bankruptcies


Major philosophical changes introduced by the Enterprise Act

Stigma attached to business failures should go: attempts to promote the rescue culture must be promoted

Individual pursuits must give way to collective procedures: administrative receivership should be minimised

Administration as an important tool in rescue process Abolition of crown preference Ring fencing a proportion of the property for the benefit

of unsecured creditors, away from holders of floating charges


Corporate voluntary arrangements

Similar to compromises under the Companies Act:– Insolvency is not a precondition– Directors to propose CVA to company and creditors– A qualified insolvency practitioner must be appointed as a nominee (trustee or

supervisor of the process)– CVA may be proposed also during liquidation or while administration is

pending Submission of proposal by the proponents to the nominee with required

disclosures and SoA – sec 2 The nominee within 28 days shall submit a report to the court whether a

meeting of company and the creditors should be summoned On order of the court, meeting shall be summoned The meeting may not affect the rights of secured creditor on his security,

except with his sanction Chairman of the meeting to report the result of the meeting to the court The court may confirm after a cooling off period of 28 days Application may be made challenging the decision within 28 days Court may appoint a supervisor


Meaning of insolvency

Sec 123 defines insolvency with reference to inability to pay

Specific tests:– Failure to meet a statutorily demanded sum of

above GBP 750 within 3 weeks– Returning of an execution unsatisfied

General tests: being subjective, these are to be proved to exist to the satisfaction of the court:– Cashflow test: inability to pay debts as they fall due:

Commercial insolvency test

– Balance sheet tests: assets are insufficient to discharge liabilities


Preferential debts for individuals and corporates

Money owned to inland revenue for tax deducted at source VAT Car tax Betting and gaming duties Social security and pension scheme contributions Remuneration of employees:

– 4 months next before the relevant date– Holiday remuneration

Changes made by Enterprise Act: money owned to Revenue, VAT, taxes and duties, and social security contributions ceased to be preferential claims

Special provisions for claims of unsecured creditors:– Holders of floating charge to cede a share (as per share prescribed)


Administration – sec 8-12

Meaning – sec 8 (2– That during the period of the order having effect, the company

shall be managed by an administrator, appointed by court Was devised by Cork Committee in line with Chapter

11 of US Bankruptcy code May be ordered if, in the opinion of the court:

– The company is, or is likely to be unable to pay its debts; AND– Passing of admin orders may achieve the purposes– May not be ordered where the company is in liquidation

Purposes (the court shall state the purpose):– Survival of the company as a going concern– Approval of CVA under part I– Giving effect to a compromise under the CA– More efficient realisation of the company’s assets than under

winding up


Process of administration

Making of an application:– By the company or its directors– By Bank of England– By creditor or creditors

Notice of the petition shall be given:– To the person who has appointed or may appoint an administrative receiver, to Bank of

England Where there is an administrative receiver, the petition for admin will be rejected

unless the court is satisfied, either,– That the floating charge will be invalid due to non-registration– May be avoided or challenged under the provisions of the IA

Interim Order – court may pass interim order restricting the rights of the directors During pendency of application for admin, the following cannot be done except with

the leave of the Court:– Resolution for winding up– Enforcement of security interests or repo of goods on hire purchase– Execution, legal process or distress

Publication of the order of administration: sec. 21 Notice to all creditors within 28 days Filing of SoA with the administrator – sec 22


Process of administration -2

Statement of proposals:– Within 3 months, shall file with RoC, and all creditors statement of his

proposals– And a lay a copy in a meeting of creditors– Send the statement to all members of the company

Consideration of proposals in a creditors’ meeting: [sec 24]– Administrator to report the result of the meeting to the court:

If the meeting has not rejected the administrator’s proposals, the court may discharge the administration order

If the proposals are approved:– Creditors may appoint a committee of creditors to oversee the implementation

Right of a creditor or member: sec 27– During administration, may apply to court if the administrator is acting against

the interest of the company, and at least his own interest Discharge of administration order:

– The administrator may apply for discharge, if the purpose is satisfied


Effect of administration order – sec 11

Petition for winding up of the company shall be dismissed Any administrative receiver of the company shall vacate his office Any receiver of any property of the company shall vacate his office to the extent

required by the administrator During period of administration, except with the leave of the court:

– No winding up resolution can be passed– No administrative receiver can be appointed– No enforcement of security interests may be done– No execution or other legal proceeding may be launched

Every document of the company bearing its name shall state that the company is in administration

The administrator takes property of the company in his custody – sec 17 Powers of the administrator [sec 14-15]

– He acts as the agent of the company– General powers to run the company– Remove directors– With the approval of the court, may sell property subject to charge;

The creditor shall then have the same priority over the resulting asset as he had on the sold asset The proceeds shall be used to pay off the creditor


Administrative receivership

One of the most unique institutions under the UK law Distinct from “receiver” to enforce a security interest,

e.g., in case of a mortgage Administrative receivers have a global security interest:

– Normal security interest receivership does not lead to bankruptcy; administrative receivership does

Is administrative receivership collective procedure:– Is he answerable only to the debentureholders?

Strictly speaking yes, but all embracing security interest gives them wider powers

– Therefore, partakes similar character as insolvency proceedings


Provisions of law regarding administrative receivers – sec 39-49

Where an administrative receiver has been appointed, every document of the company shall state so

If admin receiver is appointed by debentureholders holding a floating charge, preferential debts shall be paid out of the assets coming to the hands of the receiver in priority:

– This payment shall be recouped out of assets payable to general creditors

The admin receiver is deemed to be the agent of the company:– Is personally liable for any contract entered into by him– And to the extent of such liability, entitled to be indemnified out of the

assets of the company The admin receiver may vacate his office

– If the court orders – sec. 45– Ceases to be qualified insolvency practitioner– Resigns from his office


Powers of administrative receiver – schedule 1

Power to receive, sell, raise or borrow money, appoint auditors, etc– 23 powers listed in schedule 1

Protection to outsiders dealing with admin receiver – doctrine of indoor management – sec 42

Power to dispose of the assets subject to a security interest:– Provided the net proceeds are applied to repayment

of the debt


Process in case of an admin receiver

Shall, within 28 days, notify all creditors of his appointment – sec 46

May require furnishing of a SoA from the officers of the company

Within 3 months of appointment, admin receiver shall send a report [sec 48]

– To every secured creditor, and RoC– To every unsecured creditor, or publish it in the prescribed

manner– Containing :

the events leading up to his appointment Disposal or proposed disposal of assets he proposes to make Amount due to debentureholders appointing him Preferential debt, and the amount available to other creditors


Limitations on admin receivership by Enterprise Act

Sec 72A inserted by Enterprise Act inserted several limitations on the power to appoint admin receivers:

– Except in excluded cases, holder of a floating charge not to appoint admin receivers

Excluded case:– Agreements forming part of a capital market arrangement– Public private partnership projects– Utility companies– Project finance– Market charge, system charge or collateral security charge in

case of financial market transactions – relevant for financial intermediaries, charges in favour of authorities


Winding up

Two forms of winding up:– Creditors voluntary winding up: members resolve to put the

company under creditors’ winding up Special resolution passed in members’ meeting The winding up is largely under the control of the creditors Winding up commences on passing of resolution

– Compulsory winding up Initiated on petition of a creditor or other person with locus standi:

– Locus standi requires manifestation of tangible interest: e.g., directors, contributories

If the court passes a winding up order, the official receiver becomes the liquidator, unless any other liquidator is appointed –sec 136

Procedural aspects:– Furnishing of an SoA– Similar procedures as in case of administration


Priorities – sec 175, etc

Expenses of winding up Preferential debts:

– If the assets are insufficient, they shall be paid out of assets subject to floating charge

– Or else paid out of assets available to general creditors Floating charge holders to cede a certain portion in favour of general

creditors General creditors Interest on outstanding debt Power to disclaim onerous property – sec 178 Power to avoid transactions at undervalue – sec 238 Power to avoid undue preferences – sec 239

– For sec 238/239, time frame is 2 years for insiders, and 6 months in general Power to avoid extortionate credit transactions – sec 244

– Transactions within 3 years prior to onset of insolvency– Terms of credit were extortionate with regard to the risk involved– Otherwise violates principles of fair dealing

Avoidance of floating charges within 2 years prior to bankruptcy


Position of secured creditors

Secured creditors’ real interest is recognised by law:– Secured creditors cannot exercise self-help repossession:

They need leave of the court

– But the leave of the court is a mere procedural formality: Ruling in David Lloyd and Co (1877) 6 Ch. D 339

Execution creditors:– Cannot enforce execution after commencement of winding up :

sec 183

Hire purchase and chattel lease transactions:– Leave of the court required, but position similar to secured

creditors


Position of floating chargeholders

Floating chargeholders u/s 176A have to relinquish a prescribed portion

The rules prove the following proportion:– (a) where the company's net property does not exceed

£10,000 in value, 50% of that property;

(b) subject to paragraph (2), where the company's net property exceeds 10,000 in value the sum of -

(i) 50% of the first £10,000 in value; and(ii) 20% of that part of the company's net property which exceeds £10,000 in value.

The value of the prescribed part of the company's net property to be made available for the satisfaction of unsecured debts of the company pursuant to section 176A shall not exceed £600,000


Prosecution of delinquent officers

Frauds in anticipation of bankruptcy [sec 206]:– If any 12 months prior to filing of bankruptcy:

Any person has concealed an asset of the company or debt Removed any of the company’s property Concealed destroyed or mutilated any books or paper Made any false entry in books or papers Pawned, pledged or Disposed of any property

– The offender is liable to imprisonment or fine or both

Transactions to defraud creditors or misconduct during winding up

Falsification of books etc Penalties for offences prior to winding up

– Contribution for wrongful trading

Corporate bankruptcy under the UK law Vinod Kothari 1012 Krishna 224 AJC Bose Road Calcutta 700 017 Phone 033-23233863/23233864/2281 1276/22817715/22813742.

Documents

enactment of insolvency

individual insolvency

corporate bankruptcies

bankruptcy act

companies act

uk law vinod kothari

law slide

supervisor slide