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Company Law

Company Law (2nd edn)

Lee Roach
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date: 30 January 2023

p. 66822. Corporate rescuefree

p. 66822. Corporate rescuefree

  • Lee RoachLee RoachSenior Lecturer, University of Portsmouth

Abstract

This chapter examines the rationale behind the rescue culture and the three principal rescue mechanisms: administration, the company voluntary arrangement, and the moratorium. The UK has sought to adopt a rescue culture, under which the law offers struggling companies access to several rescue mechanisms. The principal rescue mechanism is administration, under which an administrator is appointed to try and fulfil the purpose of administration. An administrator can be appointed by the court, the holder of a qualifying floating charge, or the company or its directors. A moratorium is imposed once a company enters administration, which prevents certain actions from proceeding. Meanwhile, a company voluntary arrangement is a rescue procedure that allows a company to enter into a binding agreement with its creditors. A company voluntary arrangement begins with a proposal being made, and that proposal must then be approved by the company and creditors. A new, free-standing moratorium was introduced in 2020.

Introduction

The financial collapse of a company and its subsequent liquidation and dissolution can have a substantial effect on a significant number of persons:

the company’s employees will lose their jobs;

the company’s creditors may not recover in full the debt owed to them;

the company’s members will lose the value of their investment and their shares will become worthless;

suppliers that relied on the company will be adversely affected;

retailers that sold the company’s goods will be adversely affected;

tax revenue will be lost;

if the company is a large national or multinational company, its collapse can adversely affect the local, national or, as the following US example demonstrates, even the worldwide economy.

The collapse of Lehman Brothers Holdings Inc.

In early 2008, Lehman Brothers Holdings Inc. (‘Lehman’), then the United States’ fourth largest investment bank, reported record revenues of nearly $60 billion and its shares were trading at $65 per share. By September 2008, its share price had fallen by 95 per cent to less than $4 per share and three days later, it filed for bankruptcy, with debts of $613 billion. It remains the largest ever corporate insolvency. Lehman’s business was broken up and sold to various parties. The process to liquidate Lehman is still ongoing.

p. 669The collapse of Lehman led to extreme volatility in the US financial markets, with the Dow Jones Index dropping 504 points (the worst drop since the reopening of the market following the 9/11 attack). This had significant impacts on other financial firms, with the notable example being AIG, which would have also collapsed had the US government not provided a $182 billion bailout. To strengthen the financial sector, in October 2008, US Congress approved the Troubled Asset Relief Program, a $700 billion rescue package.1

Lehman’s collapse had global repercussions. Events at Lehman intensified the global financial crisis considerably, with commentators stating that Lehman’s collapse ‘almost brought down the world’s financial system’2 and ‘triggered a system-wide crisis of confidence in banks across the globe’.3 Lehman’s clients and parties that had dealings with Lehman sustained significant losses, which in turn had adverse effects on businesses with no direct links to Lehman. Banking sectors around the world were in chaos. In October 2008, concerns regarding the stability of UK banks led to the UK government announcing a £500 billion rescue package. Countries around the world slid into recession.

One would therefore assume that the law would establish mechanisms designed to help companies in a financially precarious position. However, prior to the passing of the Insolvency Act 1985 and its replacement by the Insolvency Act 1986 (IA 1986), the law did little to help struggling companies, who were basically ‘left to die’. The problem is one of balancing interests. The pre-1985 law protected creditors by seeking to ensure that the creditors recovered as much of the money owed to them as possible, but the result of this was invariably that companies were liquidated and dissolved, even where they might have been rescued. Therefore, one could argue that the law should seek to aid financially vulnerable companies by creating a ‘rescue culture’,4 whereby such companies are supported to attempt a return to profitability. This balancing of interests was recognized by the Cork Report, which stated that one of the aims of insolvency law was:

to relieve and protect where necessary the insolvent … from any harassment and undue demands by his creditors, whilst taking into consideration the rights which the insolvent … should legitimately continue to enjoy; at the same time, to have regard to the rights of creditors whose own position may be at risk due to the insolvency.5

The Cork Report firmly favoured the fostering of a rescue culture, stating that insolvency law should ‘provide means for the preservation of viable commercial enterprises capable of making a useful contribution to the economic life of the country’.6 The view strongly shaped the Insolvency p. 670Acts of 1985 and 1986, which provided for two mechanisms designed to help rescue struggling companies, namely, administration and the company voluntary arrangement.

For several decades, the UK’s rescue regime did not undergo any major updates, since which time the global financial crisis led many countries to re-examine whether aspects of their rescue and restructuring procedures were fit for purpose. In 2014, the EU Commission passed a Recommendation which encouraged Member States ‘to put in place a framework that enables the efficient restructuring of viable enterprises in financial difficulty and give honest entrepreneurs a second chance. …’7 The key word here is ‘viable’—it has long been recognized that not all companies should be the subject of rescue and that ‘[c]orporate rescue mechanisms are not intended to maintain inefficient firms that are not economically viable. …’8 The government decided to consult on the issue and, in May 2016, the Insolvency Service published a consultation document9 that set out several proposals for reform, with the government response stating that it would proceed with several reform proposals.10 However, little immediate progress was made. With the onset of the COVID-19 pandemic and the adverse consequences caused by businesses having to close, the government decided that the rescue proposals needed to be implemented as a matter of urgency. The result was the Corporate Insolvency and Governance Act 2020 (CIGA 2020), which introduced two new rescue mechanisms, namely, the moratorium and the restructuring plan.

The restructuring plan was discussed at 21.3 and so this chapter will focus on the three other rescue mechanisms, namely, (i) administration; (ii) the company voluntary arrangement; and (iii) the moratorium.

22.1 Administration

As Figure 22.1 demonstrates, administration is the most popular rescue procedure and takes on an increased importance in times of economic difficulty:

In January 2009, the UK officially entered recession for the first time since 1991. The preceding few months were notable for the unprecedented number of prominent high-street companies that went into administration (e.g. The Pier, Woolworths, Zavvi, USC, Whittard of Chelsea, and MFI). Even once the recession was over, the continuing difficult economic conditions resulted in many more well-known companies entering administration (e.g. HMV, Blockbuster, Comet, JJB Sports, Peacocks).

The introduction of the lockdown following the COVID-19 pandemic and the consequent loss of economic activity once again saw the UK enter a recession, with many retail companies turning to administration to survive, including Laura Ashley, Cath Kidston, p. 671Debenhams, Oasis, Warehouse, Victoria’s Secret UK, Monsoon Accessorize, Peacocks, Jaeger, and Paperchase. In several cases, administration was unsuccessful and the company went into liquidation (e.g. Victoria’s Secret UK, Debenhams).

Figure 22.1 Rescue procedures in the UK

Source: statistics derived from the Insolvency Service’s Insolvency Statistics, available from www.gov.uk/government/collections/insolvency-service-official-statistics.

Administration was introduced following the recommendations of the Cork Report. This report noted that floating chargeholders often had the right to appoint a receiver who could, if the charge instrument so provided, take over the company’s management, which could lead to an ailing business returning to profitability, upon which time the receiver relinquishes control to the directors. The report regarded this as ‘of outstanding benefit to the general public and to society as a whole’11 and so recommended that, in a wider range of circumstances, provision should be made to enable a person to appoint an administrator who would be empowered to engage in measures designed to rescue the company. This recommendation was implemented by the Insolvency Act 1985 and re-enacted in Pt II and Sch B1 of the IA 1986.

Administration offers several potential benefits over liquidation:

the company may be rescued and can continue contributing to society by providing goods and services, paying tax, taking on employees, etc.;

administration is likely to be cheaper than liquidation;

placing the company in administration may allow the company’s business to be sold as a going concern for a satisfactory price, rather than a ‘fire sale’ on liquidation, during which the assets are sold off for whatever price the liquidator can get;

p. 672 administration allows a company currently trading profitably, but burdened by debt from past unsuccessful enterprises, to trade on with some form of debt moratorium; and

if administration is successful, creditors will likely have better prospects of being repaid.

Of course, these benefits are conditional on administration being successful, and so it is important to consider what the purpose of administration is.

22.1.1 The purpose of administration

When a company enters administration, an administrator will be appointed to ‘manage the company’s affairs, business and property’.12 The administrator must perform their functions with the objective of achieving ‘the purpose of administration’, which is a set of three objectives13 (as set out in Figure 22.2). In practice, although these of objectives are semi-hierarchical, which objective is pursued is based on the professional judgement of the administrator (e.g. whether objectives (b) or (c) are pursued depends in part on what the administrator ‘thinks’ is reasonably practicable). This allows the administrator to quite easily depart from objective (a), which is rarely pursued in practice (although it should remain the first objective considered). The most common outcome of administration is that the business of the company is sold to a third party and the company is then liquidated and dissolved (this outcome would fall within objective (b)). This demonstrates that administrators distinguish between rescuing the business of the company p. 673and rescuing the company itself (a distinction that the IA 1986 itself does not make). From this, it follows that, in practice, it is only objective (a) that is concerned with rescuing the company, whereas objectives (b) and (c) focus more on rescuing the business the company engages in.14 From this, Frisby has contended that rescuing the corporate entity can be thought of as a ‘pure rescue’, whereas rescuing the business is more accurately thought of as a form of ‘corporate recycling’.15

Figure 22.2 The purpose of administration

1 IA 1986, Sch B1, para 3(3);

2 IA 1986, Sch B1, para 3(2);

3 IA 1986, Sch B1, para 3(4).

22.1.2 Appointment of an administrator

Upon the appointment of an administrator, the company is said to ‘enter administration’ and will remain ‘in administration’ until such time as the administrator’s appointment ceases.16 The IA 1986 provides that an administrator can be appointed in three ways:17

1.

by an administration order of the court;

2.

by the holder of a qualifying floating charge; or

3.

by the company or its directors.

Accordingly, the first method requires a court order, whilst the other two methods are out-of-court procedures. Companies tend to prefer the out-of-court procedures as they are cheaper, easier, quicker, and will involve less publicity, but the court procedure does have some advantages over the out-of-court procedures that might make it more useful in certain circumstances.

Each of these three methods of appointment is subject to limitations specific to each method of appointment, but there are several general restrictions that apply to all methods of appointment. First, only a qualified insolvency practitioner can be appointed as an administrator.18 Second, subject to limited exceptions, a person cannot be appointed as administrator of a company that is already in administration.19 Third, a person cannot be appointed as administrator of a company that is in liquidation, subject to two exceptions:

1.

where the company is subject to a compulsory winding-up order, then a qualifying floating chargeholder may appoint an administrator;20

2.

the liquidator may make an administration application.21

Each method of appointment will now be discussed.

22.1.2.1 Appointment by the court

An administrator can be appointed by the court making an administration order.22 This will require an administration application to be made to the court, but only certain persons have standing to bring an application, including:

the company, its directors, or one or more creditors of the company (or any combination of these persons);23

p. 674 the supervisor of a company voluntary arrangement (CVA);24

the liquidator of the company;25

the Financial Conduct Authority (FCA).26

Upon receipt of an application, the court may make an administration order if two conditions are satisfied,27 namely:

1.

The company is, or is likely to become, unable to pay its debts.28 The word ‘likely’ has been interpreted to mean that the applicant must show that it is ‘more probable than not’29 that the company will become unable to pay its debts.

2.

The administration order is reasonably likely to achieve the purpose of administration. Here, the word ‘likely’ requires the applicant to demonstrate that there is a ‘real prospect that the administration order will achieve its purpose’.30

Note that as the IA 1986 states that the court ‘may’ make an administration order, it follows that, even if the above two conditions are met, the court may still refuse to make an administration order. Upon hearing an administration application, the court may:

make the administration order sought;

dismiss the application;

adjourn the hearing;

make an interim order;

treat the application as a winding-up petition and make any order it could make under s 125; or

make any other order which the court thinks appropriate.31

22.1.2.2 Appointment by a qualifying floating chargeholder

Under Sch B1, para 14, the holder of a ‘qualifying floating charge’ in respect of the company’s property may appoint an administrator. A floating charge will be qualifying if (i) it alone, or in combination with any other forms of security, covers the whole, or substantially the whole, of the company’s property;32 and (ii) the instrument which created the charge:

states that para 14 applies to the charge; or

purports to empower the holder to appoint an administrator; or

purports to empower the holder to appoint an administrative receiver.33

This power of appointment is subject to three limitations. First, no appointment can be made unless the floating chargeholder has given at least two business days’ written notice to any holder of a prior qualifying floating charge, or the holder of any prior qualifying floating charge has consented to the making of the appointment.34 Second, a floating p. 675chargeholder cannot appoint an administrator while their charge is unenforceable35 (e.g. because it was avoided under s 245). Third, an administrator cannot be appointed if a provisional liquidator of the company has been appointed or an administrative receiver of the company is in office.36

22.1.2.3 Appointment by the company or directors

Schedule B1, para 22 provides that an administrator may be appointed by the company or its directors. In practice, appointment by the directors37 is more common, as appointment by the company generally requires the members to pass an ordinary resolution (unless the company’s articles empower the board to appoint an administrator on behalf of the company). The ability of the company or directors to appoint an administrator is subject to several limitations:

an administrator cannot be appointed within 12 months of (i) the ending of a previous administration initiated under para 22,38 or (ii) the ending of a moratorium under Sch A1 which failed to result in a voluntary arrangement being in force;39

an administrator cannot be appointed if (i) a petition to wind up the company has been presented and has not yet been disposed of, (ii) an administrative application has been made and is not yet disposed of, or (iii) an administrative receiver of the company is in office.40

The company or directors must give at least five business days’ written notice to qualifying floating chargeholders and any person who is, or may be, entitled to appoint an administrative receiver.41 This notice must identify the proposed administrator and it must be filed with the court, along with a statutory declaration stating, inter alia, that the company is unable, or is unlikely to be able, to pay its debts, and that the company is not in liquidation.42 A notice of appointment must also be filed with the court.43 Once these notices have been filed, the appointment of the administrator takes effect.44

Schedule B1, para 22 provides that the company or its directors may not appoint an administrator, unless the requirements regarding notice have been complied with. However, r 12.64 of the Insolvency (England and Wales) Rules 2016 provides that no insolvency proceedings shall be invalidated by any formal defect or any irregularity unless the court considers that substantial injustice has been caused by the defect and that the injustice cannot be remedied by the court. The question is when will a defect in the appointment of an administrator render the appointment invalid and when can a defect be remedied by the court? A significant body of recent case law has arisen in this area, which states that a failure to provide the required notice will not automatically render the appointment void (indeed, the courts will generally try to avoid invalidating the appointment). The courts have held that whether the administrator’s appointment should be invalidated will depend on whether Parliament intended that outcome.45 This is determined by first identifying the purpose of the provision breached and, second, by p. 676examining the consequences of the defect.46 In Re Skeggs Beef Ltd,47 the court identified three categories of defect:

1.

Where the defect is fundamental, then the appointment will be void and it cannot be cured by the court. For example, where an administrator was purportedly appointed to deal with the affairs of a limited partnership, but the appointment was made using the form intended for use by companies, the appointment was held to be invalid.48

2.

Where the defect is not fundamental and causes no substantial injustice, then the appointment will not be invalidated due to the defect. For example, where notice was not provided to a qualifying chargeholder, but the debt to that chargeholder was fully repaid, the Court held that the administrator’s appointment was valid, as no substantial injustice had been caused by the defect.49

3.

Where the defect is not fundamental, but does cause substantial injustice, then the court must ask itself whether the substantial injustice can be remedied by a court order. If so, an order can be made curing the defect. If not, the appointment will be invalid.

Much of the case law in this area has been first instance only and it is occasionally conflicting. More recent cases have indicated that the courts appear to be reluctant to invalidate an administrator’s appointment unless substantial injustice has been caused or there has been ‘an egregious failure to follow the rules’,50 even in cases involving a complete failure to provide notice.51 Whilst more recent decisions do provide more clarity, legislative or higher court clarification is desirable.

22.1.3 Effects of administration

A company entering administration results in several effects, which are designed to enable the administrator to better pursue the purpose of administration.

22.1.3.1 Dismissal of winding-up petitions and receivers

The purpose of administration could not be achieved if persons were free to wind up a company in administration. Accordingly, if a winding-up petition has been sought against a company, then that petition shall be dismissed if an administration order is made, and shall be suspended if an administrator is appointed by a qualifying floating chargeholder.52 This means that the appointment of an administrator can be used to fend off the liquidation of a company, as the following example demonstrates.

Portsmouth Football Club and administration

Portsmouth City Football Club Ltd (‘Portsmouth FC’) first entered administration in 1998 and was rescued following a takeover deal. In 2009, it again experienced severe financial difficulties and was unable to pay tax as it was due, resulting in Her Majesty’s Revenue and Customs (HMRC) filing a winding-up petition in December 2009. In February 2010, prior to the winding-up petition p. 677being heard, Portpin Ltd (a qualifying floating chargeholder) appointed an administrator. This caused HMRC’s winding up petition to be suspended and it was withdrawn in March. The administrator proposed that a CVA be entered into and the administrator be authorized to sell Portsmouth FC’s assets. The CVA was approved53 and, in October 2010, the business and its assets were sold to a new company, Portsmouth Football Club (2010) Ltd. Portsmouth FC left administration in February 2011 and was later dissolved.

In January 2012, HMRC launched a winding-up petition against Portsmouth Football Club (2010) Ltd for unpaid tax, but a qualifying floating chargeholder again appointed an administrator and the company entered administration. HMRC once again withdrew its winding-up petition. In April 2013, Portsmouth Football Club (2010) left administration and its assets were sold to Portsmouth Community Football Club Ltd, which is primarily owned by the Pompey Supporters Trust.54 In September 2014, the Trust announced that the club was debt-free and had paid off its creditors.

When a company enters administration (irrespective of how the administrator is appointed), then any receiver shall vacate office if the administrator requires them to.55 When an administration order takes effect, then any administrative receiver shall vacate office.56

22.1.3.2 Effects on directors

A company entering administration does not automatically result in the directors ceasing to hold office (although the administrator is empowered to appoint and remove directors).57 Accordingly, the directors remain subject to any statutory obligations and duties (e.g. the general duties).58 However, the IA 1986 provides that an officer of a company in administration may not exercise a management power without the consent of the administrator.59 The result of this is that, for the duration of the administration, the powers of the directors are effectively suspended.

An administrator is also empowered to bring proceedings on behalf of the company,60 which can include bringing proceedings against the directors (e.g. if the administrator believes that the directors have engaged in fraudulent trading61 or wrongful trading).62

22.1.3.3 The moratorium

Perhaps the most beneficial aspect of administration is the imposition of the statutory moratorium. The purpose of administration (especially objective (a) in Figure 22.2) would be frustrated if the company’s creditors were able to enforce their security during administration, or if creditors could petition for the company’s winding up. Accordingly, p. 678unless permission has been obtained from the administrator or the court, no creditor may during the period of the administration:

take steps to enforce security over the company’s property;

take steps to repossess goods in the company’s possession under a hire-purchase agreement; or

institute or continue any legal process (including legal proceedings, execution, and distress) against the company or property of the company.63

In addition, during the period of administration, (i) a resolution cannot be made to wind the company up, nor can a compulsory winding up be ordered;64 and (ii) an administrative receiver cannot be appointed.65 The rationale behind the moratorium is clear: it grants the company vital breathing space and allows the administrator to put their proposals into effect and enter into arrangements with the creditors, with the aim of rescuing the company. However, this moratorium only applies to companies in administration and so a financially struggling company is still vulnerable prior to the company formally entering administration. To combat this, the IA 1986 provides for an interim moratorium, which applies in the following circumstances:

where an application for an administration order has been made, the interim moratorium commences when the application has not yet been granted or dismissed, or where the application has been granted but the administration has not yet taken effect;66

where a qualifying floating chargeholder files notice of an intention to appoint an administrator, then the interim moratorium commences when the notice is filed and expires upon the appointment of the administrator taking effect, or five business days after the filing of the notice without an administrator being appointed.67

22.1.3.4 Publicity

It is important that persons who deal with a company in administration are aware of this. Accordingly, while a company is in administration, every business document issued by or on behalf of the company or the administrator, and all the company’s websites, must state the name of the administrator and that the affairs, business, and property of the company are being managed by the administrator.68 Failure to comply with this requirement constitutes a criminal offence.69

22.1.4 The proposals

Upon appointment, the administrator’s principal task is to determine how best to achieve the purpose of administration. Accordingly, within eight weeks following their appointment, the administrator must prepare proposals for achieving the purpose of administration and send them to the registrar of companies, and every member and creditor of whose address they are aware.70

p. 679Within 10 weeks of the company entering into administration, the administrator must seek a decision from the creditors as to whether they approve the proposals,71 although Sch B1, para 52(1) provides several instances where a decision of the creditors need not be sought (e.g. where the company has sufficient property to enable each creditor to be paid in full). Historically, decisions by creditors had to be taken at a meeting of the creditors, but the Small Business, Enterprise and Employment Act 2015 (SBEEA 2015) abolished this requirement72 and the creditors’ decision can now be taken by using one of two decision-making methods:

the qualifying decision procedure can be used, with the details of this procedure (e.g. how the result of the decision is determined) to be decided by the administrator;73 or

the ‘deemed consent procedure’ can be used, under which the proposal will be approved unless 10 per cent of the creditors in value object to the proposal.74 If such a percentage does object, then the decision will not be deemed to have been made and, if a decision on the same matter is sought again, it must be sought using a qualifying decision procedure.75

Two outcomes can follow, based on whether approval is obtained or not:

the creditors approve the proposals without modification, or approve them with modifications (providing the administrator consents to the modifications).76 Once approved, the administrator must manage the affairs of the company in accordance with the approved proposals.77 Following approval, if the administrator wishes to revise the proposals, then a creditors’ meeting will need to be summoned to approve the revised proposals;78

the creditors do not approve the proposals, in which case, the court may (i) terminate the administrator’s appointment; (ii) adjourn the hearing conditionally or unconditionally; (iii) make an interim order; (iv) make an order on a petition for winding up; or (iv) make any other order that it thinks appropriate.79

22.1.5 The powers of an administrator

An administrator is an officer80 and agent81 of the company and is granted extensive powers, being able to ‘do anything necessary or expedient for the management of the affairs, business and property of the company’.82 The administrator also has the 23 powers listed in Sch 1,83 including the power to:

take possession of, collect, and get in the property of the company, and, for that purpose, to take such proceedings as may seem to them expedient;

sell or otherwise dispose of the property of the company by public auction or private contract;

raise or borrow money and grant security over the company’s property;

bring or defend any action or other legal proceedings in the name and on behalf of the company;

p. 680 appoint agents and appoint and dismiss employees;

make any payment that is necessary or incidental to the performance of his functions;

carry on the business of the company and establish subsidiaries of the company;

present or defend a petition for the winding up of the company.

Further powers are listed in Sch B1, including the power to appoint and remove directors, call a meeting of the members, and seek a decision on any matter from the company’s creditors.84 It should be noted that as the administrator can do ‘anything necessary or expedient for the management of the affairs, business and property of the company’, the powers listed in Schs 1 and B1 should not be regarded as exhaustive.

22.1.5.1 Pre-packs

The above powers of an administrator can be exercised as soon as the administrator is appointed, meaning that an administrator can exercise these powers prior to their proposals being approved. The cause for concern that has arisen here is that this allows the administrator to sell the assets of the company without the creditor’s consent which may—depending on the terms of the sale—adversely affect the creditors’ chances of being repaid. The courts are aware of this concern and have stated that an administrator can sell the company’s assets prior to their proposals being approved only if they believe the sale to be in the best interests of the creditors.85 This allows for a pre-packaged administration (or ‘pre-packs’ as they are known), which has been defined as ‘an arrangement under which the sale of all or part of a company’s business or assets is negotiated with a purchaser prior to the appointment of an administrator and the administrator effects the sale immediately on, or shortly after, appointment’.86 This means that the key difference between a ‘normal’ administration and a pre-pack is that, in the former, the administrator begins work after they have been appointed whereas, in a pre-pack, all the negotiations are completed prior to the administrator being formally appointed.

A clear advantage of pre-packs is speed. They allow for the details of the rescue to be negotiated prior to administration, and then put into effect quickly (as evidenced by the one day that Dreams Ltd spent in administration in the example below). The advantages of this are that the disruption to the business may be minimal, the costs of administration can be kept low, the likelihood that important contracts will be lost is reduced, and the brand’s business and goodwill can be preserved. Finch argues that this speed is:

particularly valuable in sectors or businesses where a protracted, public restructuring would dramatically affect corporate value—as, for instance, in a regulated sector (where possibilities of retaining licences, franchises and other valued positions may be affected) or where a business is built on human rather than physical assets (where there are dangers that the best staff will be lost to competitors), or where a brand or portfolio would be damaged by adverse publicity or public uncertainty.87

The following provides an example of these advantages in practice.p. 681

The pre-pack of Dreams Ltd

In 2013, Dreams Ltd (the UK’s largest specialist beds retailer) was experiencing severe financial difficulties and was unable to pay its debts. It was placed into administration on the 5 March 2013 and was sold the following day to Sun Capital Partners as part of a pre-negotiated pre-pack deal, under which Sun Capital paid £35 million for 171 of Dreams’ 266 stores (the remaining 95 stores were Dreams’ least profitable, and remained open for business whilst the administrator looked for a buyer). As a result of the pre-pack, Dreams was saved from almost certain liquidation, customer orders were honoured, and nearly 1,700 employees kept their jobs. In addition, Dreams’ creditors were paid 75 per cent of the debts owed to them (considerably more than they would have received had the company been liquidated).

The success of the pre-pack is evident in that Dreams was subsequently able to pay off all its debts, its turnover increased significantly, and its profits trebled. In May 2021, Sun Capital announced that it had sold Dreams for $475 million to Tempur Sealy International.

However, the speed with which pre-packs can be implemented also raises concerns, notably that they ‘tend to ride roughshod over the procedural and substantive interests of less powerful creditors’88 and that ‘[t]he speed and secrecy of the operation often lead to a deal being executed about which the unsecured creditors know nothing, have no say in and which leaves them empty handed’.89 One notable concern is where the pre-pack involves the company’s business being sold to a person connected with the company (e.g. directors or members).90 In such a case, the business may be able to continue with minimal interruption whilst maintaining the goodwill generated by the business, but the fact that the original directors or members are running the business (often through a new company) means that it has effectively been phoenixed. The result is that the directors can carry on business as normal, but the creditors of the company whose assets were sold off in the pre-pack may be left unpaid. The judicial response to such concerns is a strong reaffirmation that a pre-pack should only be effected if it is in the interests of the company’s creditors.91 Where the pre-pack is to be implemented by placing the company into administration by seeking an administration order from the court, then the court generally takes the view that the merits of the pre-pack are for the administrator and the company’s creditors (who may challenge the administrator’s decision).92 However, the court does still have a discretion and ‘where there is a significant risk of abuse, the court cannot wash its hands of the matter and approve an administration with a view to simply leaving matters to the administrator’s judgement’.93

Phoenix company: a company with the same (or very similar) name to a company that has been liquidated, and which was set up by the directors of the liquidated company (discussed at 23.3.5)

p. 682In addition, the Insolvency Service and the regulatory bodies for insolvency practitioners met to discuss how to best regulate pre-packs. The result was the publication of Statement of Insolvency Practice 16 (‘SIP 16’),94 which provides that the administrator must provide creditors with a Statement of Insolvency Practice 16 Statement, which provides a detailed explanation and justification of why a pre-packaged sale was undertaken and all alternatives considered, to demonstrate that the administrator has acted with due regard for the creditors’ interests.95 Where the sale was made to someone connected with the company, the level of detail will need to be greater. As the following case demonstrates, a court may refuse to make an administration order if the requirements of SIP 16 are not complied with.

Re Moss Groundworks Ltd [2019] EWHC 2825 (Ch)

FACTS: Moss Groundworks Ltd (‘Moss’) had assets valued at over £1 million. Historically, it had traded profitably but, in 2019, the company recorded a loss of £96,000. The result was that it could not pay its suppliers and owed considerable sums to many creditors. After seeking advice, the directors decided that the best course of action was a pre-pack sale of Moss’s assets and business. Advertisements for the sale were placed on two websites, but potential buyers only had 48 hours to register their interest. As a result, only one buyer registered interest, which was a newly incorporated company that was connected to Moss’s directors. This company offered to buy all of Moss’s assets and business for £130,000. To implement the pre-pack, Moss’s directors applied to the court for an administration order.

HELD: Paragraph 13 of SIP 16 provides that the administrator’s report on the pre-pack should comply with the ‘marketing essentials’ set out in SIP 16’s appendix. These marketing essentials include that (i) the sale of a business should be marketed as widely as possible to make the sale known to as many potential buyers as possible; (ii) the SIP 16 Statement should justify the marketing strategy; and (iii) the administrator needs to explain how the marketing strategy achieved the best outcome for the company’s creditors. Here, the proposed administrator did none of this and simply asserted that the marketing essentials were complied with. There was also no adequate explanation as to why Moss’s business should be sold to the connected company for £130,000 when it had assets of over £1 million. Snowden J held that this was ‘wholly inadequate’96 and was not satisfied that the proposed pre-pack was not an abuse of the administration procedure. Accordingly, he refused to make an application order.97

Despite SIP 16, concerns still existed regarding the potential for pre-packs to be abused, which led to the government commissioning an independent review of pre-pack administrations.98 The Graham Review put forward six recommendations, with the principal recommendation being the creation of a ‘Pre-Pack Pool’. The Pre-Pack Pool, which p. 683was created in 2015,99 is an independent body of experienced businesspersons. Parties involved in a proposed pre-pack may apply to the Pool and a member of the Pool will review the proposed pre-pack and offer an opinion on its reasonableness. Note that the scheme is entirely voluntary and the Pool’s opinion carries no legal weight, so the administrator need not follow the Pool’s recommendation. However, the Pool has been rarely used. For example, in 2019, there were 473 pre-packs, of which 260 involved a sale of the business to a connected party, yet only 23 of these were referred to the Pool.100

The Graham Review also recommended that the government may wish to put in place a reserve legislative power allowing it to enact legislative rules if the voluntary measures were insufficient.101 The SBEEA 2015 therefore amended the IA 1986 to empower the Secretary of State to pass regulations enabling them to prohibit pre-packs or impose requirements or conditions upon pre-packs.102 Given the low usage of the Pre-Pack Pool and concerns regarding the use of pre-packs, such regulations have now been passed, namely, the Administration (Restrictions on Disposal etc. to Connected Persons) Regulations 2021.103 The Regulations apply where an administrator is proposing to make a ‘substantial disposal’, which is defined as a disposal, hiring out, or sale of all or a substantial part of the company’s business or assets to a connected person104 during an eight-week period beginning on the day the company enters administration.105 An administrator must not make a substantial disposal, unless either of the following two conditions are met:

1.

The creditors approve the disposal.106 In order for this approval to be valid, the administrator must include proposals for the disposal in the statement setting out how they propose to achieve the purpose of administration.107 The administrator may then seek a decision from the company’s creditors, who may approve the proposed disposal with or without modifications.108

2.

A qualifying report in respect of the disposal has been made.109 The onus on obtaining this report is placed on the connected person.110 In order for a report to be qualifying, it must meet the list of requirements set out in reg 6 (e.g. it is in writing and is authenticated by an evaluator)111 and it must contain the content specified in reg 7 (e.g. details regarding the evaluator, a statement that the disposal is or is not reasonable in the circumstances, and the evaluator’s reasons for this opinion).112 The report must be sent to the registrar of companies and every creditor of the company.113 If the report states that the disposal is not reasonable, the administrator may still proceed with the disposal, but they must explain their reasons for doing so.

p. 684It should be noted that the Regulations do not specify any consequences for what will occur if a substantial disposal is made without any of these two conditions being met. Accordingly, it is not yet known whether a failure to comply with these rules could invalidate the disposal.

22.1.6 Termination of administration

An administrator’s appointment can be terminated in numerous ways. There is one form of automatic termination, namely, that the administrator’s appointment automatically terminates one year after they were appointed.114 However, this period can be extended in two ways:

1.

The administrator can apply to the court for an extension.115 The court can grant as many extensions as it wishes for as long as it wishes, but it cannot grant an extension after the administrator’s period in office has expired.116

2.

The administrator’s term of office can be extended by up to one year by consent.117 Consent is required from each secured creditor, and (if the company has any) from the unsecured creditors.118 Note that this method of extension can only be used once.119

In all other cases, the termination of administration is not automatic and requires some form of action:

Following an application from the administrator, the court can terminate an administrator’s appointment,120 but only if the administrator thinks that (i) the purpose of administration cannot be achieved; (ii) the company should not have entered administration; or (iii) the company’s creditors decide that the administrator should apply for a termination of his appointment.121

Where an administrator is appointed by a qualifying floating chargeholder, the company, or its directors, then if the administrator thinks that the purpose of administration has been fulfilled, they may file a notice with the court and with Companies House, which will terminate his appointment.122

A creditor can apply to the court for an order terminating the administrator’s appointment on the ground that the person who appointed them or applied for an administration order did so for an improper motive.123

If a company in administration is subject to a winding-up petition on public interest grounds, the court will usually order that the administrator’s appointment will cease, although it may also provide that the appointment will continue.124

The administrator’s appointment will cease if they send notice to the registrar of companies indicating that they intend to place the company into a creditors’ voluntary liquidation,125 or that they intend to dissolve it.126

22.2p. 685 Company voluntary arrangements

The company voluntary arrangement (CVA) is an important rescue procedure that allows a company to enter into a binding arrangement with its creditors. As a CVA is an insolvency procedure, it is usually invoked by insolvent companies and can result in turning around a company’s fortunes if the underlying business is sound.

Historically, the CVA was a much underused procedure, with administration proving to be far more popular, leading the government to state that the CVA was ‘limited as a tool for company rescue’.127 However, in recent years (especially during the COVID-19 pandemic), the popularity of the CVA has increased, with numerous high-street companies utilizing a CVA in an attempt to rescue their business.128 Indeed, a CVA can be an extremely effective rescue procedure and can, in some cases, be preferable to administration, as the following example demonstrates.

The CVA of Travelodge Hotels Ltd

Travelodge Hotels Ltd operates one of the largest hotel chains in the UK. In 2012, the company had debts of £500 million and, despite reasonable financial performance, it was unable to keep up with interest payments on those debts (which amounted to around £100 million per year). Accordingly, in August 2012, the company proposed a CVA, which provided that Travelodge would pay reduced rent on 109 of the 500 hotels it leased,129 and 49 hotels that it leased would be offloaded onto other operators. In conjunction with the CVA, the company and three of its largest creditors agreed to a financial restructuring of the company under which, in return for obtaining control of the company, these creditors would inject £75 million into the company and write off £709 million of the company’s debt. KPMG (which supervised the CVA) stated that if the company was put into administration, the unsecured creditors could expect to receive 0.2 per cent of the debt owed to them, but under the CVA, the debt they would recover would be 23.4 per cent.

The CVA was approved by 97 per cent of the company’s creditors and 96 per cent of the hotel’s landlords, and was put into effect in September 2012. Of the £75 million injection, £55 million was used to refurbish the company’s hotels. Over the course of the next five years, the company’s financial performance was turned around, with significant increases in turnover and profits. In 2016, the company announced it was opening 19 new hotels. The creditors who obtained control of the company put the company up for sale in 2015 for £1 billion, but these plans were suspended in 2016.

Although the CVA was technically introduced by the Insolvency Act 1985, the provisions of that Act relating to CVAs never actually came into force, and the key provisions today are found in Pt I of the IA 1986. The procedures for putting a CVA into place will now be discussed, but Figure 22.3 sets out the process.p. 686

Figure 22.3 The CVA process

22.2.1 Proposal of a CVA

The first step in entering into a CVA is the proposal of an arrangement between the company and its creditors. Three persons are empowered to propose such an arrangement:

1.

where the company is in administration, the administrator may propose the arrangement;130

2.

where the company is in liquidation, the liquidator may propose the arrangement;131

3.

where the company is not in administration or liquidation, then the directors may propose the arrangement.132

The proposal must provide for some person (known as the ‘nominee’) who will supervise the CVA, and this person must be a qualified insolvency practitioner.133 The procedure that follows depends upon who the nominee is.

22.2.1.1p. 687 Where the nominee is the administrator/liquidator

Where the company is in administration/liquidation, then the administrator/liquidator (as applicable) can act as nominee (although they can choose not to). Here, the nominee shall simply summon a meeting of the company and seek a decision from the company’s creditors as to whether to approve the proposal.134

22.2.1.2 Where the nominee is not the administrator/liquidator

Where the nominee is not an administrator or liquidator (which occurs where the directors proposed the CVA or the administrator/liquidator decided not to act as nominee), then a qualified insolvency practitioner will have to be appointed to act as nominee. That nominee must, within 28 days of being given notice of the proposed CVA, submit a report to the court stating whether in their opinion:

the proposed CVA has a reasonable prospect of being approved and implemented;

the proposal should be considered by a meeting of the company and by the company’s creditors; and

if it should, the date on which, and time and place at which, they propose that a meeting of the company should be held.135

If the nominee reports that the proposal should be considered by a meeting of the company and by the company’s creditors, they should summon a meeting of the company and seek a decision from the company’s creditors.136

22.2.1.3 Approval of the proposal

Where the proposal is put to the company and creditors for approval, then they may reject or approve the proposed CVA with or without modifications.137 Neither the company nor its creditors can approve a proposal or modification if it (i) affects the right of a secured creditor of the company to enforce their security, except with the concurrence of the creditor concerned;138 or (ii) affects the priority of any preferential debt, unless the preferential creditor concerned concurs.139 As a result of (i), most secured creditors do not join CVA plans, meaning that companies usually need to engage in separate negotiations with each secured creditor, which often increases the cost and duration of the rescue process.140

Approval is obtained as follows:

At the meeting of the company, approval is granted if a majority (in value) of the members vote in favour of approving the proposal.141

The creditors will decide whether they approve of the proposal by way of a qualifying decision procedure,142 with the details of this procedure (e.g. how the result of the decision is determined) to be decided by the nominee.143 Alternatively, the ‘deemed consent procedure’ can be used, under which the proposal will be approved unless 10 per cent of the creditors in value object to the proposal.144

p. 688The decisions of the company and the creditors must be reported to the court.145 If the decisions of the company and the creditors conflict, then the decision of the creditors prevails,146 but a member may, within 28 days, apply to the court, which may order that the decision of the meeting of the company shall have effect, or make any other order that it sees fit.147

If the proposal is approved, it takes effect as if made by the company at the time the creditors approved it. The nominee will become known as the ‘supervisor’ and will supervise the CVA.148 The CVA will bind every person who had notice of, or was entitled to vote, in the qualifying decision procedure by which the creditors’ decision to approve the CVA was made.149 If the company is being wound up or is in administration, then the court may (i) stay the winding up or terminate the administrator’s appointment (as applicable); and/or (ii) give such directions with respect to the winding up or administration as it thinks appropriate for facilitating the implementation of the CVA.150

That an approved CVA can bind those creditors who did not vote for it is one of its major strengths, but it has led to criticisms that it can adversely affect certain types of creditor. As the following example demonstrates, in recent years, CVAs have been increasingly used to target landlords.

CVAs, retailers and landlords

The decline of the UK retail sector, largely due to fierce online competition coupled with the effects of the COVID-19 pandemic, led many retail businesses to consider how they could minimize their costs. One of the most significant costs retailers face are the costs of renting the premises within which they conduct business. Accordingly, CVAs are increasingly utilized to amend rental payments being made to landlords. Notable examples include:

In 2018, Regis UK entered into a CVA that provided for rent reductions of between 25 and 100 per cent across 110 of its salons.

In 2019, Debenhams entered into a CVA that provided for rent to be reduced based on store turnover, with the worst performing stores receiving rent reductions of 75 per cent.

In 2020, New Look entered into a CVA that provided for rent to be based on store turnover across 402 stores, whilst its remaining 68 stores would pay no rent for three years. Landlords were given the option to terminate the leases based on certain conditions.

In 2020, Caffè Nero entered into a CVA which would see landlords receive 30 per cent of the rent they were owed, and most of its stores move to rent payments based upon store turnover.

A common theme among these CVAs is that they largely focus on landlord agreements, but leave the rights of other creditors largely unaffected. The result is that, even if the landlords oppose the CVA, the other creditors will likely support it, resulting in the CVA being approved. This has led to concerns that such CVAs ‘are often seen as singling out landlords’,151 which has led to the British Property Foundation (the body the represents UK landlords) to urge the government to tackle the ‘abuse of CVAs’.152

p. 689If a CVA is approved, then the only possible recourse that the landlords have is to challenge the CVA in court (which is discussed next), but, to date, very few of these challenges have succeeded. For example, the challenges against the CVAs of Debenhams,153 New Look,154 and Caffè Nero155 failed to invalidate the CVAs. The challenge against Regis’s CVA succeeded on one ground,156 resulting in the CVA being revoked, but this had no effect in practice, as the CVA had already been terminated.

22.2.1.4 Challenging a CVA

Within 28 days of the report of the meeting being given to the court, a nominee, liquidator, or administrator (if the company is in liquidation or administration), or anyone who had a right to vote as a member or creditor, can apply to the court on the ground that:

the CVA unfairly prejudices the interests of a creditor, member, or contributory of the company; and/or

there has been some material irregularity at or in relation to the meeting of the company, or in relation to the decision procedure in which the creditors decided to approve the CVA.157

If the court agrees with the applicant, it can (i) revoke or suspend any decision approving the CVA; (ii) give directions for a further meeting of the company to be convened to consider a revised proposal; or (iii) direct any person to seek a decision from the creditors as to whether they approve the revised proposal.158

22.2.2 Abolition of the moratorium for eligible companies

As noted, CVAs are useful, but historically underused. One reason for this is that it is relatively easy for a dissenting creditor to derail a CVA by appointing an administrator or receiver, or by petitioning the court for a winding-up order. To combat this, a form of CVA was introduced by the Insolvency Act 2000 that provided ‘eligible companies’ with a moratorium similar to that available to companies in administration.159 An ‘eligible’ company was basically a company that was classified as a ‘small company’ under the CA 2006.160

Although the moratorium was useful, in practice it was rarely used. This is because CVAs tended to be more useful for larger companies with complex financing and multiple creditors, and such companies were not eligible for the moratorium. The government did consider opening up the moratorium to medium or large-sized companies, but concluded that it would likely still be underused due to the burdensome nature of the p. 690rules relating to it.161 This is evidenced by the fact that fewer than 10 per cent of small companies that proposed a CVA used the moratorium.162 This, coupled with the introduction of the new free-standing moratorium (discussed next), led the government to conclude that the CVA moratorium should be abolished,163 which it was in June 2020.164

22.3 The moratorium

The World Bank recommends that ‘a stay of actions by secured creditors should be imposed … in reorganization proceedings where the collateral is needed for the reorganization … Exceptions to the general rule on a stay of enforcement actions should be limited and clearly defined.’165 Clearly, the World Bank believes a moratorium should be much more generally available than was the case under UK law where, prior to June 2020, no free-standing moratorium existed and a moratorium was only generally available to companies in administration. Therefore, the Insolvency Service proposed that a ‘preliminary moratorium’ should be available to insolvent companies or companies in financial difficulty.166 The purpose of this moratorium is to provide ‘a company in financial distress a breathing space in which to explore its rescue and restructuring options free from creditor action’.167 This could involve the utilization of a formal rescue procedure (e.g. entering administration or a CVA), but this is not a requirement, and the moratorium is not a gateway to any particular procedure.168 The government largely accepted the proposal,169 and it was implemented by the CIGA 2020 inserting a new Pt A1 into the IA 1986.

22.3.1 Eligibility

Any company can obtain a moratorium, unless it is excluded from doing so,170 with Sch ZA1 providing that certain companies are ineligible, including:

insurance companies, banks, investment banks and investment firms;

a company that is a recognized investment exchange or recognized clearing house; and

a company whose registered/head office is outside the UK.

The government has made clear that ‘the moratorium is intended to be used to help rescue a viable company in financial difficulty. It is not intended to simply delay the inevitable insolvency of a company that has no realistic prospect of survival’.171 Accordingly, the moratorium is also not available to:

p. 691 any company that already has a moratorium in force, or has had a moratorium in force at any time in the previous 12 months; or

any company that is subject to an insolvency procedure (e.g. administration, a CVA, or a winding-up order), or has been subject to an insolvency procedure in the previous 12 months.

22.3.2 Obtaining a moratorium

The procedure for obtaining a moratorium depends upon the status of the company, as follows:

The directors of a UK-registered company that is not subject to an outstanding winding-up petition can obtain a moratorium by filing the relevant documents with the court.172 The moratorium comes into effect once these documents have been filed.173

The directors of a company that is subject to a winding-up petition may apply to the court to obtain a moratorium, and this application must be accompanied by the relevant documents.174 The court may then make an order granting the moratorium or any other order that it thinks appropriate, but it can only make an order granting a moratorium if it is satisfied that the moratorium would achieve a better result for the company’s creditors as a whole that would be likely if the company were wound up (without first being subject to a moratorium).175 The moratorium comes into effect as soon as the order is made.176

The directors of an overseas company that is not subject to a winding-up petition may apply to the court to obtain a moratorium, and this application must be accompanied by the relevant documents.177 The court may then make an order granting the moratorium or any other order that it thinks appropriate.178 The moratorium comes into effect as soon as the order is made.179

In each case, ‘relevant documents’ must be provided to the court. These are set out in s A6 and include:

a statement from the proposed monitor confirming that they consent to act as monitor and that the company is eligible for a moratorium;

a statement from the directors that, in their view, the company is, or is likely to become, unable to pay its debts; and

a statement from the proposed monitor that, in their view, it is likely that a moratorium would result in the rescue of the company as a going concern.

If, for the purpose of obtaining a moratorium, an officer of the company makes a false representation or fraudulently does, or omits to do, anything, a criminal offence will be committed, irrespective of whether the moratorium is obtained.180

Upon the moratorium coming into force, the proposed monitor will become the monitor181 and their role is to monitor the company’s affairs for the purpose of forming a view as to whether it remains likely that the moratorium will result in the rescue of the company as a going concern.182 In order to fulfil that function, the monitor can require the directors to provide any information183 and the monitor is entitled to rely on this information, unless they have reason to doubt its accuracy.184

22.3.3p. 692 The length of a moratorium

A moratorium will end after an ‘initial period’ of 20 business days,185 unless it is terminated prior to this (see 22.3.5) or the moratorium is extended.186 A moratorium can be extended in several ways:

the directors can, without creditor consent, extend the moratorium by a further 20 business days by filing with the court a notice that they wish to extend the moratorium;187

if the directors have obtained creditor consent for an extension, they can extend the moratorium to the date the creditors agreed to by filing with the court a notice that they wish to extend the moratorium;188

the directors may apply to the court for an order that the moratorium be extended, and the court may extend it to such a date as it thinks fit.189

If, for the purpose of obtaining an extension, an officer of the company makes a false representation or fraudulently does, or omits to do, anything, a criminal offence will be committed, irrespective of whether the extension is obtained.190

22.3.4 The effects of a moratorium

To provide the company with the breathing space required, the moratorium permits or prevents certain persons from engaging in specified actions during the moratorium period:

subject to specified exceptions, insolvency proceedings may not be brought against the company;191

certain legal proceedings cannot be brought against the company, notably no steps can be taken to enforce any security over the company’s property (subject to specified exceptions);192

floating chargeholders cannot give any notice which would have the effect of causing the charge to crystallize;193

the company cannot obtain credit of more than £500 unless it informs the lender that a moratorium is in force;194

the company can only grant security over its property if the monitor consents;195

the company acquires a payment holiday in respect of certain pre-moratorium debts, and is only permitted to pay off pre-moratorium debts up to a specified amount,196 unless the monitor consents or a court order is obtained;197

p. 693 the company can only dispose of its property if (i) the disposal is made in the ordinary way of the company’s business, (ii) the monitor consents, or (iii) the disposal is in pursuance of a court order;198

the company may, with the permission of the court, dispose of property subject to a security interest as if it were not subject to the security interest.199

The fact that a company contravenes some of the above rules (namely, those found in s A19 or ss A25–A32) will not make any transaction void or unenforceable.200

22.3.5 The termination of a moratorium

A moratorium will end upon the expiration of the initial period or, if it has been extended, at the expiration of the extended period. A moratorium can be terminated prior to the expiration of these periods in four ways. First, a moratorium will end if the company enters into a Pt 26 scheme of arrangement or a Pt 26A restructuring plan.201 Second, a moratorium will end if the company enters into a relevant insolvency procedure (e.g. a CVA, administration, liquidation).202 Third, the monitor can terminate the moratorium by filing a notice with the court in several circumstances, including:

where the monitor thinks that the moratorium is no longer likely to result in the rescue of the company as a going concern;

where the monitor thinks that the objective of rescuing the company as a going concern has been achieved;

where the monitor thinks that they are unable to carry out their functions due to the directors failing to provide information they have required them to provide; or

where the monitor thinks that the company is unable to pay certain debts (e.g. debts which the company becomes liable for during the moratorium).203

Fourth, as is discussed next, the court can terminate a moratorium if a successful challenge is brought against the actions of the monitor or the directors.

22.3.6 Challenging a moratorium

Certain persons may apply to the court challenging the monitor’s actions or a director’s actions during a moratorium.204 First, a creditor, director, or member of the company, or any person affected by the moratorium may apply to the court challenging the moratorium on the ground that an act, omission, or decision of the monitor during the moratorium unfairly harmed the interests of the applicant.205 The court may then (i) confirm, reverse, or modify any act or decision of the monitor; (ii) give the monitor directions; or (iii) make such order as it thinks fit (apart from order the monitor to pay compensation).206

p. 694Second, a creditor or member of the company may apply to the court on the ground that:

(a)

during a moratorium, the company’s affairs, business and property are being or have been managed by the directors in a manner which has unfairly harmed the interests of its creditors or members generally or of some part of its creditors or members (including at least the applicant); or

(b)

any actual or proposed act or omission of the directors during a moratorium causes or would cause such harm.207

Following such an application, the court may make such order as it thinks fit.208 This could include an order regulating the management of the company’s affairs, requiring the directors to do or refrain from doing an act, or bringing the moratorium to an end.209

Chapter summary

The UK has sought to adopt a rescue culture, under which the law offers struggling companies access to several rescue mechanisms.

The principal rescue mechanism is administration, under which an administrator is appointed to try and fulfil the purpose of administration.

An administrator can be appointed by (i) the court; (ii) the holder of a qualifying floating charge; or (iii) the company or its directors.

A moratorium is imposed once a company enters administration, which prevents certain actions from proceedings (e.g. creditors cannot take steps to enforce their security).

A CVA is a rescue procedure that allows a company to enter into a binding agreement with its creditors.

A CVA begins with a proposal being made, and that proposal must then be approved by the company and creditors.

A new free-standing moratorium procedure has been introduced by the CIGA 2020.

Further reading

  • Jennifer Payne, ‘A New UK Debt Restructuring Regime? A Critique of the Insolvency Service’s Consultation Paper’ (14 June 2016), available at https://www.law.ox.ac.uk/business-law-blog/blog/2016/06/new-uk-debt-restructuring-regime-critique-insolvency-service’s, accessed 12 January 2022.
  • Discusses the reform proposes put forward by the Insolvency Service in its 2016 consultation paper.

  • p. 695John Tribe, ‘Company Voluntary Arrangements and Rescue: A New Hope and a Tudor Orthodoxy’ [2009] JBL 454.
  • Critically examines the history, usage, and effectiveness of CVAs.

  • John M Wood, ‘The Objectives of Administration’ (2015) 36 Co Law 1.
  • Provides a detailed discussion of the purpose of administration. Argues that the results of administration may not necessarily conform with the hierarchy of objectives.

  • Muir Hunter, ‘The Nature and Functions of a Rescue Culture’ [1999] JBL 491.
  • Discusses in depth what constitutes a rescue culture and whether such a culture is desirable or justified.

  • Teresa Graham, ‘Graham Review into Pre-Pack Administration’ (2014).
  • An independent report commissioned by the government, which reviewed the law and practice relating to pre-pack administrations and made several reform recommendations.

  • Vanessa Finch, ‘Corporate Rescue in a World of Debt’ [2008] JBL 756.
  • Examines how corporate rescue has evolved based on changes in the market for credit.

  • Report of the Review Committee on Insolvency Law and Practice (Cmnd 8558, HMSO 1982).
  • The recommendations of the Cork Report led to the Insolvency Acts of 1985 and 1986. This report recommended, inter alia, that UK insolvency law should foster a rescue culture.

    Self-test questions

    1.

    Define the following terms:

    rescue culture;

    moratorium;

    pre-pack administration;

    company voluntary arrangement.

    2.

    State whether each of the following statements is true or false and, if false, explain why:

    The principal purpose of administration is to rescue the business of the company as a going concern.

    An administrator can only be appointed by the company or by the court.

    When a company enters administration, the directors will vacate office.

    An administrator’s appointment will automatically terminate after one year, unless an extension is obtained.

    A CVA does not come with a moratorium.

    A receiver is a person appointed by a secured creditor to recover payment owed to that creditor.

    3.

    To what extent has the UK adopted a rescue culture, and should the law seek to rescue financially struggling companies?

    4.

    Dragon plc borrowed £2 million from Welsh Bank plc to renovate several of its factories and purchase new equipment. This loan was secured by way of a fixed charge over the company’s headquarters. The renovations were completed and the equipment purchased, but the company then experienced a significant downturn in performance and it has struggled to pay its debts. Dragon also had an overdraft with Welsh Bank, and the bank agreed to increase Dagon’s overdraft limit in return for a floating charge ‘over all the assets and business of the company’.

    p. 696Dragon’s financial position continued to decline and it now cannot pay its debts as they fall due. Dragon has fully drawn on its overdraft facility and it owes HMRC £100,000 in unpaid tax. Accordingly, HMRC filed a petition to wind up the company.

    Concerned that it will not be repaid in full, a bank manager of Welsh Bank has requested a meeting with the board of Dragon. Prior to the meeting, the bank manager seeks your advice regarding the following:

    If HMRC’s winding-up petition is granted, will the bank be repaid in full?

    Could the bank recover the debt owed to it by appointing a receiver?

    Would the bank stand a better chance of being repaid if Dragon was placed in administration? If so, can the bank appoint an administrator, bearing in mind HMRC’s winding-up petition? If the bank is able to appoint an administrator, set out the process by which the administrator would be appointed.

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    Notes

    • 1 This was later reduced to $475 billion by the Dodd–Frank Wall Street Reform and Consumer Protection Act.

    • 2 ‘The Origins of the Financial Crisis: Crash Course’, The Economist (London, 7 September 2013).

    • 3 Andrew Clark, ‘How the Collapse of Lehman Brothers Pushed Capitalism to the Brink’, The Guardian (London, 4 September 2009).

    • 4 For a detailed discussion of the advantages and disadvantages of a rescue culture, see Muir Hunter, ‘The Nature and Functions of a Rescue Culture’ [1999] JBL 491; Vanessa Finch, Corporate Insolvency Law: Perspectives and Principles (2nd edn, CUP 2009) ch 6.

    • 5 HMSO, Report of the Review Committee on Insolvency Law and Practice (Cmnd 8558, HMSO 1982) para 198.

    • 6 ibid.

    • 7 Commission Recommendation 2014/135/EU of 12 March 2014 on a new approach to business failure and insolvency [2014] OJ L74.

    • 8 Insolvency Service, ‘A Review of Company Rescue and Business Reconstruction Mechanisms’ (Insolvency Service 2000) para 24.

    • 9 Insolvency Service, ‘A Review of the Corporate Insolvency Framework: A Consultation on Options for Reform’ (Insolvency Service 2016).

    • 10 Department for Business, Energy and Industrial Strategy (BEIS), ‘Insolvency and Corporate Governance: Government Response’ (BEIS 2018).

    • 11 Report of the Review Committee on Insolvency Law and Practice (Cmnd 8558, HMSO 1982) para 495.

    • 12 IA 1986, Sch B1, para 1(1).

    • 13 ibid, Sch B1, para 3(1).

    • 14 John M Wood, ‘The Objectives of Administration’ (2015) 36 Co Law 1, 6.

    • 15 Sandra Frisby, ‘In Search of a Rescue Regime: The Enterprise Act 2002’ (2004) 67 MLR 247, 248–49.

    • 16 IA 1986, Sch B1, para 1(2).

    • 17 ibid Sch B1, para 2.

    • 18 ibid Sch B1, para 6.

    • 19 ibid Sch B1, para 7.

    • 20 ibid Sch B1, para 37.

    • 21 ibid Sch B1, para 38(1).

    • 22 ibid Sch B1, para 10.

    • 23 ibid Sch B1, para 12(1).

    • 24 ibid Sch B1, para 12(1) and s 7(4)(b).

    • 25 ibid Sch B1, para 38(1).

    • 26 Financial Services and Markets Act 2000 (FSMA 2000), s 359(1).

    • 27 IA 1986, Sch B1, para 11.

    • 28 This condition need not be satisfied if the applicant could appoint an administrator by virtue of being a qualifying floating chargeholder (IA 1986, Sch B1, para 35).

    • 29 Re AA Mutual International Insurance Co Ltd [2004] EWHC 2430 (Ch), [2005] 2 BCLC 8 [21] (Lewison J).

    • 30 ibid.

    • 31 IA 1986, Sch B1, para 13(1).

    • 32 ibid Sch B1, para 14(3).

    • 33 ibid Sch B1, para 14(2).

    • 34 ibid Sch B1, para 15(1). A floating charge is prior to another if it was created first or is treated as having priority (Sch B1, para 15(2)). The contents of this notice are specified in r 3.16 of the Insolvency (England and Wales) Rules 2016.

    • 35 IA 1986, Sch B1, para 16.

    • 36 ibid Sch B1, para 17.

    • 37 In such a case, a majority of the directors must agree to the appointment (ibid Sch B1, para 105).

    • 38 ibid Sch B1, para 23(2).

    • 39 ibid Sch B1, para 24.

    • 40 ibid Sch B1, para 25.

    • 41 ibid Sch B1, para 26. The contents of this notice are specified in r 3.23 of the Insolvency (England and Wales) Rules 2016.

    • 42 IA 1986, Sch B1, para 27.

    • 43 ibid Sch B1, para 29.

    • 44 ibid Sch B1, para 31.

    • 45 Re Ceart Risk Services Ltd [2012] EWHC 1178 (Ch), [2012] BCC 592.

    • 46 Re Tokenhouse VB Ltd [2020] EWHC 3171 (Ch), [2021] BCC 107.

    • 47 [2019] EWHC 2607 (Ch), [2020] BCC 43 [21] (Marcus Smith J).

    • 48 Re Kaupthing Capital Partners II Master LP Inc [2010] EWHC 836 (Ch), [2011] BCC 338.

    • 49 Re Zoom UK Distribution Ltd [2021] EWHC 800 (Ch).

    • 50 Re NMUL Realisations Ltd [2021] EWHC 94 (Ch) [29] (Frith J).

    • 51 See, e.g. Re Tokenhouse VB Ltd [2020] EWHC 3171 (Ch), [2021] BCC 107.

    • 52 IA 1986, Sch B1, para 40(1). This will not apply to a public interest petition (Sch B1, para 40(2)(a)).

    • 53 Under the terms of the CVA, HMRC would not have received the full amount owed to it and it sought a court order suspending the CVA, but this was rejected (HMRC v Portsmouth City Football Club Ltd [2010] EWHC 2013 (Ch), [2011] BCC 149).

    • 54 The Pompey Supporters Trust is a trust consisting of fans of Portsmouth FC who contributed money to enable the Trust to purchase the club.

    • 55 IA 1986, Sch B1, para 41(1).

    • 56 ibid Sch B1, para 41(2).

    • 57 ibid Sch B1, para 61.

    • 58 Re System Building Services Group Ltd [2020] EWHC 54 (Ch), [2020] BCC 345.

    • 59 IA 1986, Sch B1, para 64(1).

    • 60 ibid Sch 1, para 5.

    • 61 ibid s 246ZA.

    • 62 ibid s 246ZB.

    • 63 ibid Sch B1, para 43.

    • 64 ibid Sch B1, para 42. Note that there are exceptions to this (e.g. a public-interest winding-up petition can be brought).

    • 65 IA 1986, Sch B1, para 43(6A).

    • 66 ibid Sch B1, para 44(1).

    • 67 ibid Sch B1, para 44(2).

    • 68 ibid Sch B1, para 45(1).

    • 69 ibid Sch B1, para 45(2).

    • 70 ibid Sch B1, para 49. Under Sch B1, para 107, this eight-week period can be extended by the court following an application by the administrator.

    • 71 ibid Sch B1, para 51. Under Sch B1, para 107, this 10-week period can be extended by the court following an application by the administrator.

    • 72 Although s 246ZE of the IA 1986 empowers the creditors to summon a creditors’ meeting, providing that those creditors represent at least 10 per cent in value or number of the creditors, or there are 10 of them.

    • 73 IA 1986, s 246ZE(2).

    • 74 ibid s 246ZF.

    • 75 ibid 246ZF(5).

    • 76 ibid Sch B1, para 53(1).

    • 77 ibid Sch B1, para 68(1).

    • 78 ibid Sch B1, para 54.

    • 79 ibid Sch B1, para 55(2).

    • 80 ibid Sch B1, para 5.

    • 81 ibid Sch B1, para 69.

    • 82 ibid Sch B1, para 59(1).

    • 83 ibid Sch B1, para 60(1).

    • 84 ibid Sch B1, paras 61–63.

    • 85 Re Transbus International Ltd [2004] EWHC 932 (Ch), [2004] 1 WLR 2654.

    • 86 Association of Business Recovery Professionals, ‘Statement of Insolvency Practice 16: Pre-Packages Sales in Administrations’ (Association of Business Recovery Professionals 2021) para 1.

    • 87 Vanessa Finch, ‘Pre-Packaged Administrations: Bargains in the Shadow of Insolvency or Shadowy Bargains?’ [2006] JBL 568, 571.

    • 88 ibid 568.

    • 89 Peter Walton, ‘When is Pre-Packaged Administration Appropriate?—a Theoretical Consideration’ (2011) 20 Nott LJ 1, 3.

    • 90 Teresa Graham, ‘Graham Review into Pre-Pack Administration’ (2014) para 7.50 found that 63.3 per cent of pre-packs involved a sale to a connected person.

    • 91 See, e.g. DKLL Solicitors v Revenue and Customs Commissioners [2007] EWHC 2067 (Ch), [2007] BCC 908; Re Kayley Vending Ltd [2009] EWHC 904 (Ch), [2009] BCC 578.

    • 92 Re Hellas Telecommunications (Luxembourg) SCA [2009] EWHC 3199 (Ch), [2010] BCC 295 [8] (Lewison J).

    • 93 Re Moss Groundworks Ltd [2019] EWHC 3079 (Ch) [8] (Eyre J).

    • 94 Association of Business Recovery Professionals, ‘Statement of Insolvency Practice 16: Pre-Packages Sales in Administrations’ (Association of Business Recovery Professionals 2021).

    • 95 ibid para 19.

    • 96 [2019] EWHC 2825 (Ch) [27].

    • 97 It should be noted that Snowden J adjourned the hearing to allow Moss and the proposed administrator additional time to consider his comments and provide additional information. The proposed administrator provided a detailed witness statement and a compliant SIP 16 report, with the result that the administration order was granted a week later (Re Moss Groundworks Ltd [2019] EWHC 3079 (Ch)).

    • 98 Teresa Graham, ‘Graham Review into Pre-Pack Administration’ (2014).

    • 99 See www.prepackpool.co.uk, accessed 12 January 2022.

    • 100 Insolvency Service, ‘Pre-Pack Sales in Administration Report’ (Insolvency Service 2020).

    • 101 Teresa Graham, ‘Graham Review into Pre-Pack Administration’ (2014) para 9.38.

    • 102 IA 1986, Sch B1, para 60A.

    • 103 SI 2021/427.

    • 104 Who constitutes a ‘connected person’ is set out in Sch B1, para 60A of the IA 1986 and includes directors (including shadow directors), officers, non-employee associates, and connected companies.

    • 105 Administration (Restrictions on Disposal etc to Connected Persons) Regulations 2021, reg 3(3). As a result of this, the Regulations are not limited to pre-packs, but to any substantial disposal.

    • 106 ibid reg 3(1)(a).

    • 107 ibid reg 4(2)(a)(i).

    • 108 ibid reg 4(2)(a)(ii) and (b).

    • 109 ibid reg 3(1)(b).

    • 110 ibid reg 6(1)(a)(i).

    • 111 Regulation 10 states that an evaluator is an individual who is satisfied that their relevant knowledge and experience is sufficient for the purposes of making a qualifying report. They must also have professional indemnity insurance (reg 11) and satisfy the independence requirement (reg 12). Finally, reg 13 provides that certain persons are excluded from acting as an evaluator (e.g. the administrator, a person subject to a disqualification order or undertaking).

    • 112 Administration (Restrictions on Disposal etc to Connected Persons) Regulations 2021, reg 5.

    • 113 ibid reg 9.

    • 114 IA 1986, Sch B1, para 76(1).

    • 115 ibid Sch B1, para 76(2)(a).

    • 116 ibid Sch B1, para 77(1).

    • 117 ibid Sch B1, para 76(2)(b).

    • 118 ibid Sch B1, para 78(1).

    • 119 ibid Sch B1, para 78(4)(a).

    • 120 ibid Sch B1, para 79(1).

    • 121 ibid Sch B1, para 79(2).

    • 122 ibid Sch B1, para 80.

    • 123 ibid Sch B1, para 81.

    • 124 ibid Sch B1, para 82.

    • 125 ibid Sch B1, para 83.

    • 126 ibid Sch B1, para 84.

    • 127 Insolvency Service, ‘A Review of the Corporate Insolvency Framework: A Consultation on Options for Reform’ (Insolvency Service 2016) para 9.2.

    • 128 Examples include All Saints, Ann Summers, Caffè Nero, Carluccio’s, Carpetright, Dune, Homebase, House of Fraser, Jamie’s Italian, Monsoon, Mothercare, New Look, Prezzo, Regis UK, Toys ‘R’ Us, and Wagamama.

    • 129 Travelodge operates a leasehold business model, under which the vast majority of the hotels it operates are not owned by Travelodge, but leased from landlords.

    • 130 IA 1986, s 1(3)(a).

    • 131 ibid s 1(3)(b).

    • 132 ibid s 1(1).

    • 133 ibid s 1(2).

    • 134 ibid s 3(2).

    • 135 ibid s 2(2).

    • 136 ibid s 3(1).

    • 137 ibid s 4(1).

    • 138 ibid s 4(3).

    • 139 ibid s 4(4).

    • 140 Insolvency Service, ‘A Review of the Corporate Insolvency Framework: A Consultation on Options for Reform’ (Insolvency Service 2016) paras 9.3–9.4.

    • 141 Insolvency (England and Wales) Rules 2016, r 2.36(1).

    • 142 IA 1986, s 3(3).

    • 143 ibid s 246ZE(2).

    • 144 ibid s 246ZF.

    • 145 ibid s 4(6) and (6A).

    • 146 ibid s 4A(2)(b).

    • 147 ibid s 4A(3) and (6).

    • 148 ibid s 7(2).

    • 149 ibid s 5(2).

    • 150 ibid s 5(3).

    • 151 Clifford Chance, ‘Death on the High Street? The Impact of CVAs’ (Clifford Chance 2019) 2.

    • 152 British Property Foundation (BPF), ‘Company Voluntary Arrangement Briefing’ (BPF 2020).

    • 153 Discovery (Northampton) Ltd v Debenhams Retail Ltd [2019] EWHC 2441 (Ch), [2020] BCC 9. The Court did accept one ground on which the challenge succeeded, but it was not enough to invalidate the CVA.

    • 154 Lazari Properties 2 Ltd v New Look Retailers Ltd [2021] EWHC 1209 (Ch).

    • 155 Nero Holdings Ltd v Young [2021] EWHC 1453 (Ch).

    • 156 Carraway Guildford (Nominee A) Ltd v Regis UK Ltd [2021] EWHC 1294 (Ch).

    • 157 IA 1986, s 6(1)–(3).

    • 158 ibid s 6(4).

    • 159 ibid s 1A (now repealed).

    • 160 ibid Sch A1, para 3 (now repealed).

    • 161 BEIS, ‘Insolvency and Corporate Governance: Government Response’ (BEIS 2018) para 5.10.

    • 162 ibid para 5.14.

    • 163 ibid.

    • 164 CIGA 2020, Sch 3, paras 2 and 30.

    • 165 World Bank, ‘Principles for Effective Insolvency and Creditor/Debtor Rights System’ (World Bank 2015) Principle C5.3.

    • 166 Insolvency Service, ‘A Review of the Corporate Insolvency Framework: A Consultation on Options for Reform’ (Insolvency Service 2016) paras 7.7 and 7.18.

    • 167 Explanatory Notes to the CIGA 2020, para 4.

    • 168 ibid para 7.

    • 169 BEIS, ‘Insolvency and Corporate Governance: Government Response’ (BEIS 2018) para 5.9.

    • 170 IA 1986, s A2 and Sch ZA1, para 1.

    • 171 House of Commons Library, ‘Corporate Insolvency and Governance Act 2020’ (Commons Library 2021) 12.

    • 172 IA 1986, s A3.

    • 173 ibid s A7(1)(a).

    • 174 ibid s A4(1)–(3).

    • 175 ibid s A4(4)–(5).

    • 176 ibid s A7(1)(b).

    • 177 ibid s A5(1)–(3).

    • 178 ibid s A5(4).

    • 179 ibid s A7(1)(c).

    • 180 ibid s A47.

    • 181 ibid s A7(2).

    • 182 ibid s A35(1).

    • 183 ibid s A36.

    • 184 ibid s A35(2).

    • 185 The initial period starts on the business day after the day on which the moratorium came into force.

    • 186 IA 1986, s A9(1) and (2). A moratorium cannot be extended once it has come to an end (s A9(5)).

    • 187 ibid s A10.

    • 188 ibid s A11. A moratorium can be extended more than once using this method, but the maximum total extension is one year beginning on the first day of the initial period (s A12(3)).

    • 189 ibid s A13. A moratorium can be extended more than once using this method.

    • 190 ibid s A47.

    • 191 ibid s A20.

    • 192 ibid s A21.

    • 193 ibid s A22.

    • 194 ibid s A25.

    • 195 ibid s A26.

    • 196 This amount is the greater of £5,000 or 1 per cent of the value of the debts and liabilities owed by the company to its unsecured creditors when the moratorium began (s A28(2)).

    • 197 CA 2006, ss A28 and A18.

    • 198 ibid s A29.

    • 199 ibid s A31. Note that the court will only grant permission if it thinks that this would support the rescue of the company as a going concern.

    • 200 ibid A33.

    • 201 ibid s A16(1)(a) and (2).

    • 202 ibid s A16(1)(b) and (3).

    • 203 ibid s A38(1).

    • 204 These applications can be made during the moratorium or after it has ended.

    • 205 IA 1986, s A42(1) and (2).

    • 206 ibid A42(4).

    • 207 ibid s A44(1).

    • 208 ibid s A44(3).

    • 209 ibid s A44(4).

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