Administration is a ‘rescue’ procedure that is available to companies and partnerships (including LLPs) who are, or are likely to become, insolvent.
There are now three routes into administration:
- by court order;
- by notice filed at court by the holder of a qualifying floating charge (“QFC”); or
- by notice filed at court by the company or its directors.
The application for a court order can be made by the company, the directors of the company, one or more creditors of the company or a combination of them.
Where a notice is filed at court by the company or its directors, then a QFC (if one exists) has the power of veto and may insist on their own choice of administrator being appointed.
Whichever route is followed, the proposed administrator must be satisfied, before accepting their appointment, that one of the three following objectives can be satisfied:
- to rescue the company as a going concern; or
- (if the first objective is not possible), to achieve a better result for the company’s creditors as a whole than would be likely if the company were wound up (without first being in administration); or
- (if the second objective is not possible), to realise property in order to make a distribution to one or more secured or preferential creditors.
The most usual outcome of an administration is the sale of the business either to coincide with the administrator’s appointment (known as a ‘pre-pack’) or after a short period of trading and marketing. Occasionally the company may exit administration into a Company Voluntary Arrangement although usually it is liquidation.
The administrator owes their duties to the company and its creditors, and is required to act in the interests of the creditors of the company as a whole. The administrator is both an agent of the company and an officer of the court. In exercising his powers and functions, the administrator of a company acts as its agent.
The primary effect of an administrator acting as a company’s agent is that, in usual circumstances, the administrator does not incur any personal liability in respect of any contract or any other obligation that they enter into on behalf of the company.
The administrator is required to prepare formal proposals for the achievement of the purpose(s) of the administration within 8 weeks of his appointment and send copies to the Registrar of Companies and circulate them to all known creditors and shareholders. The administrator must hold a creditors’ meeting within 10 weeks of their appointment to approve the proposals. Creditors may propose and agree modifications to the administrator’s proposals.
The administration terminates automatically after a year, although the creditors can agree to a six month extension. The administration can be extended further but only pursuant to a court order.
Once the administrator has achieved the purpose of the administration, the administrator will be released from office. If the administrator has assets or monies to distribute to creditors, then the administration may be converted to a liquidation. Occasionally, and where the company’s business has not been sold, the administration may be exited and the company placed into a Voluntary Arrangement or even returned to the control of the directors.
An annulment in bankruptcy can only be granted by the Court and if granted, it is as if the bankruptcy order had never been made. For the majority of cases, it is crucial that any application to the Court is made as soon after the bankruptcy order is made if it is to have a chance of success. An annulment can only be applied for if:
- The bankruptcy order should not have been made in the first place.
- All your bankruptcy debts, fees and expenses have been paid or secured.
- You have entered into an "Individual Voluntary Arrangement" with your creditors.
The law is well developed and quite complex in this area and our team are very experienced in this particular area and can advise as to whether or not an annulment application is viable depending upon individual circumstances.
The word "antecedent" is defined as "going before". In a very basic form, under insolvency legislation an Official Receiver or Trustee in Bankruptcy can challenge any transactions which have taken place prior to bankruptcy which are deemed to be wrong.
In the lead up to an insolvency process, it is crucial that the debtor ensures that they act honestly, honourably and fairly in dealings with others who could be impacted by the process. Any transactions which take place prior to the bankruptcy may be investigated and reviewed.
There are three main types of reviewable, or antecedent transactions, described in the Insolvency Act 1986 (the Act) under English law:
- transactions at an undervalue;
- transactions defrauding creditors;
Bankruptcy is not always that easy option that you hear so much about and the extent to which it will affect you will depend upon your individual circumstances. Following a bankruptcy order being made, your circumstances may also change, for the better or for the worse which may affect your home, property or income. Not knowing what your options are, and you do still have them as a bankrupt, is worrying and good legal advice from those experienced in all aspects of bankruptcy is a must.
A bankruptcy petition is effectively the application to the Court asking the Court to make a person bankrupt. It can be presented to the Court by an individual who wishes to be made bankrupt or by a creditor seeking to make a person bankrupt who has not paid a debt.
Whether you are a person facing a bankruptcy petition or a person who wishes to present a petition against a debtor, we are able to advise and assist on all aspects of this procedure. We regularly appear before the Court on bankruptcy petitions on behalf of debtors and creditors seeking bankruptcy orders or in opposing petitions
Bankruptcy Restriction Orders ("BRO")
A Bankruptcy Restriction Order is an order that can be made by the Court in the case of a bankrupt person who has engaged in culpable or dishonest conduct. In many cases an undertaking (Bankruptcy Restriction Undertaking “BRU”) can be given by the bankrupt to comply with bankruptcy restrictions to avoid the necessity of the matter going to Court.
The debtor who is given a BRO or agrees to a BRU will find themselves under certain restrictions for a period of between two and fifteen years, and they are the same restrictions that every person who goes bankrupt is under during a normal bankruptcy period except for it will be for a longer period.
The normal restrictions in bankruptcy include but are not limited to:
- You must declare your bankruptcy to a potential lender if you are attempting to borrow more than £500 in credit
- If you are self-employed or part of a business, you must not trade in any style other than that in which you went bankrupt
- You may not be a company director which includes the taking part in the promotion, formation, or management of a company without prior approval from the courts
- You cannot act as an insolvency practitioner, receiver, or manager of the property of a company on behalf of debenture holders
- You cannot be a member of parliament in England or Wales
- You cannot hold certain public offices
So, what conduct could result in a BRU or BRO being obtained? Examples are:
- You purposefully incurred debts knowing full well that you could not repay
- You sell assets for less than their market value or give them away for free
- As a priority you made payments to family and friends rather than to other creditors
- Your spending was unreasonably extravagant
- You engaged in gambling activities or making bad speculations
- You increased your debts as a result of neglecting your business affairs and responsibilities
- You engaged in fraudulent activities or breach of trust
- You carried on with your business when you should have filed for insolvency
The length of time for which a BRU or BRO will have effect will be determined by the seriousness of the offence. It is a criminal offence to breach a BRO or BRU the penalty for which is either a fine or possibly imprisonment and accordingly is not something which should be taken lightly. Accordingly a lengthy BRU or BRO can have serious ramifications in terms of a person being able to get back on their feet financially and advice should be sought.
Company Voluntary Arrangement (“CVA”)
A company voluntary arrangement is a ‘rescue’ procedure for a company in financial difficulties, whether solvent or insolvent. It is an arrangement between the company and its creditors which is supervised by an insolvency practitioner.
The aim of a CVA is to assist companies from entering liquidation by allowing the company to form an informal, but binding, agreement with unsecured creditors. Beware – a CVA does not affect the rights of secured creditors and they are entitled to enforce their security. In particular it is worth noting that a secured creditor cannot vote on a CVA except on any part of the debt that is unsecured. Therefore the company would either need to negotiate with a secured creditor separately or pay the debt in full. Additionally, a proposal must allow preferential creditors to be paid first and the unsecured creditors to be paid on an equal basis.
The CVA agreement may reduce the company’s debts or simply reschedule them over a longer period of time. As the arrangement is informal, the CVA may incorporate different types of proposals which are tailored to the individual company’s needs.
Both the creditors and shareholders of the company decide whether to approve a CVA proposal. The creditors and shareholders may also suggest modifications to the proposal. In order to be approved, the proposal must obtain 75% votes in favour from all of the company creditors that are present and voting at the meeting. Out of the 50% voting in favour of the proposal, at least 50% must be unconnected to the company. Once approved, a CVA binds all parties that were entitled to vote and attend the meeting.
Creditors Voluntary Liquidation
Creditors’ voluntary liquidation is a procedure which is instigated by an insolvent company. Usually, the directors of the company realise that the company’s liabilities exceed the company’s assets or the company cannot afford to pay its debts as and when they fall due.
The members of the company then pass a special resolution to wind the company up and nominate an insolvency practitioner to act as a liquidator. A creditors meeting is then convened at which the creditors vote to appoint the liquidator (who may or may not be the member’s nominee).
The liquidator is appointed to sell the assets of the company and the proceeds are then distributed to the company’s creditors. If there is a surplus of proceeds the remainder is distributed to the company’s members. At the end of this process the company is dissolved.
Debt Advice and filing for bankruptcy
Depending on your personal circumstances there may be a number of possible debt solutions available to you. Which one is right for you and your circumstances can be difficult to determine unless you fully understand what each solution means and its possible implications on you. We advise on all aspects of debt related matters including giving advice on possible solutions, negotiating with creditors, bailiff appointments and repossessions.
If bankruptcy is the only option then we can advise and assist with the completion of the forms for bankruptcy and assist with filing the forms and the Court hearing itself.
In accordance with section 1 of the Company Directors Disqualification Act 1986 a Court may make a disqualification order against a person that he shall not, without leave of the court, be a director of a company or in any way, whether directly or indirectly, be concerned or take part in the promotion, formation or management of a company for a specified period.
The Court is likely to disqualify a director of a company if the company becomes insolvent and the director’s conduct makes him unfit to be concerned in the management of a company going forward.
The Court is entitled to disqualify a director for a minimum period of two years and a maximum period of fifteen years.
The Court will consider the following points when deciding on the unfitness of a director and whether to disqualify:
- Any misfeasance or breach of any fiduciary duty by the director in relation to the company;
- Misapplication or retention of any money or other property of the company;
- Failure to comply with the provisions in the Companies Act 2006 relating to the keeping of accounting records, registers of directors and secretaries and duty to make annual returns;
- The extent of the director's responsibility for the insolvency of the company;
- Any failure to supply goods or services paid for in advance; and
- The giving of preferences or transactions at an undervalue by the company.
If in the course of a winding up of a company it appears any business of the company has been carried on with intent to defraud creditors of the company, or for any fraudulent purpose, the liquidator can apply to the Court for an Order that any persons who were knowingly party to the fraudulent business must make a contribution to the company’s assets. The application to the Court is by the liquidator is in accordance with section 213 of the Insolvency Act 1986.
From previous case law it is clear that the minimum act for fraudulent trading to be proven is when a company continues to incur debts when it is obvious that the company is insolvent.
Individual Voluntary Arrangements ("IVAs")
As in bankruptcy, an IVA may or may not be for you. Whilst an IVA is there for anyone who meets the criteria again its not always the easy option that may have initially been promised to you. We can advise to enable you to make an informed decision as to whether or not an IVA is for you and help you through the procedure.
IVAs are one of the most popular debt management solutions taken up in the UK and have attracted a lot of publicity since their introduction in 1986. IVAs have their advantages for both creditors and debtors with creditors receiving a better return in an IVA than they would in a bankruptcy and debtors being able to avoid the consequences of bankruptcy, particularly if you are company director. An IVA often appeals to debtors who wish to avoid bankruptcy and its associated penalties. It also gives the debtor more control over how assets are dealt with and increased peace of mind that no further debts will accrue
An IVA is a legally binding agreement which protects a person against any further action from creditors.
An informal arrangement is a way of dealing with your debts whereby you agree to make regular payments over a period of time to your creditors. Reduced payments can often be negotiated and informal arrangements are not registered. An informal arrangement is often useful in circumstances whereby a person is suffering short term financial difficulties to tide you over under your financial circumstances improve. They are not always a long term solution.
Key Features of an IVA
If you're in serious debt, and are struggling to make your repayments an IVA can afford a number of benefits ie:
- Repayment is agreed over a fixed period at an affordable level depending on your circumstances
- Creditors agree to write off the remaining balance once your IVA is completed.
- The pressure is off in that you no longer have to deal with individual creditors yourself.
- Once your IVA is accepted all further interest and charges on your debts will be frozen..
- Your career will not be affected in the majority of cases.
- Security of knowing that the IVA is legally binding.
- Whilst your home may still be at risk it is dealt with in a much more controlled manner under the terms of the IVA.
- The home is protected from any action by unsecured creditors.
- Any creditor who votes against the IVA is bound by its terms if accepted by the majority.
- The stigma of bankruptcy is avoided.
- Creditors are unable to pursue and bailiffs are prevented from calling.
If an IVA is to work then it is imperative that expert advice is sought. An IVA will not be viable for everyone and in the circumstances where an IVA has been implemented and doesn’t work, this can be both costly and very stressful for the debtor.
Practical advice is therefore essential in terms of determining whether an IVA is the right solution and then implementing that solution. Our experienced team will give that advice and assist in formulating the proposals to be put to creditors in both a form and in content which creditors are likely to accept and which are affordable and realistic for the debtor.
Members Voluntary Liquidation
The difference between a “members voluntary liquidation” and a “creditors voluntary liquidation” is that with a members voluntary liquidation the directors have to swear a statutory declaration of solvency under section 89 of the Insolvency Act 1986.
A statutory declaration of solvency is a statement made by the majority of directors confirming that they have made a full investigation into the company’s affairs and finances and are satisfied that the company is able to pay all its debts (together with interest) in full within a specified period which is not to exceed 12 months from the commencement of the winding up procedure.
The directors of a company are not to make a statutory declaration lightly. The directors will be liable to imprisonment, a fine or both if it is held that they did not have reasonable grounds to make the declaration.
Once the statutory declaration is made, the members of the company have five weeks to pass a special resolution to wind the company up and appoint a liquidator. The company must then deliver the statutory declaration to the Registrar of Companies at Companies House.
The liquidator’s role is to sell the assets of the company and distribute the proceeds to the company’s creditors.
A misfeasance claim can be brought by the Official Receiver, liquidator or any creditor of the company under section 212 of the Insolvency Act 1986.
If it appears that a director* of a company has misapplied or retained, or become accountable for, any money or property of the company, or has been guilty of any breach of duty during the course of the company being wound up then he is guilty of misfeasance.
The Court may order the director to account for money or property, restore or repay such sum as it deems fit to the company’s assets.
*This section does not only relate to directors of the company but it applies to any officer of the company or any person who has taken part in or concerned with the promotion, formation or management of the company
The commencement of the administration process includes a statutory moratorium, which prevents the company’s creditors from commencing or continuing enforcement action against the Company. This is intended to provide the company with a breathing space.
The moratorium lasts for the duration of the administration. Therefore, unless the creditor has consent from the administrator or permission of the court, the creditor is stopped from (amongst other things):
- repossessing their goods in the company’s possession under a hire purchase agreement (which term includes retention of title provisions);
- a landlord’s right of forfeiture by peaceable re-entry; and
- any commencing or continuing any legal process (including legal proceedings, execution, distress and diligence) against the company or its property
A preference is when a company (as per section 239 of the Insolvency Act 1986) or a bankrupt (as per section 341 of the Insolvency Act 1986) does an act or allows something to be done which has the effect of putting that person (whether it is a creditor, surety or guarantor) in a position which, in the event of the company going into insolvent liquidation, will be better than the position he would have been in if that act or thing had not been done.
The application to the Court to set aside the preference has to be made by an office holder. The preference has to have been made within the six months before the company entered administration or liquidation or the bankrupt was made bankrupt. However the office holder has the power to look at all acts done within the two years before should the person receiving the preference be connected to the company.
Pre-packs have attracted a great deal of adverse publicity, although in many circumstances they do represent the best overall outcome for creditors.
The administrator may be in a position to sell the business and/or assets of the company before the creditors’ meeting, in which case their report and proposals to the creditors will be limited to dealing with the distribution of the sale proceeds.
A pre-pack sale is essentially one where the preparatory work for the sale of the business or assets, including the terms of a sale agreement are completed before the administrator is appointed. Immediately on appointment, the administrator then sells the business and/or assets of the company to the purchaser who has already agreed terms. Quite often, the purchaser may be the former management of the company.
The principal purpose of a pre-pack sale is to limit the potential destructive effect of an insolvency or cessation of trade that may otherwise occur in a liquidation or normal administration.
Statement of Insolvency Practice 16 sets out the best practice that an Insolvency Practitioner should follow in a pre-pack sale.
A Statutory Demand is a formal process where demand is made for the payment or other satisfaction of a debt that is owed by a debtor to a creditor. The Statutory Demand provides the debtor with a limited amount of time to either pay or satisfy the debt or have it set aside by the court.
If you receive a Statutory Demand then you must take action quickly if you dispute the debt in part or in full or perhaps you accept the debt is due but cannot afford to pay it immediately. Ignoring a Statutory Demand can be very costly in the long term if bankruptcy needs to be avoided and dealing with it quickly is more likely to result in a compromise with the creditor.
For most people, one of the biggest concerns when there are financial difficulties is what is going to happen to the home.
The home is at risk if mortgage payments can not be made, if bankruptcy is looming or potentially where creditors are seeking to place charging orders over property but there are often solutions depending on the individual circumstances. We can advise on all of these aspects.
In a bankruptcy situation, if you are bankrupt and own a property then your interest in that property vests in either the Official Receiver or Trustee in Bankruptcy whichever is appointed. At some point, within 3 years of the bankruptcy, the interest in the property must be dealt with and this can result in the property being either sold or transferred. In many cases a solution can be found whereby the home can be preserved for the family even after bankruptcy. In some cases the property can be protected initially before bankruptcy however particular specialist advice is essential before any steps in this regard are taken.
Disputes as to the extent to which a co-owner of a property is entitled to a share is very common and this is an extremely complicated area of the law. For example, a co-owner who is not bankrupt may claim to be entitled to a larger share of the property than a co-owner who is bankrupt and we regularly advise on such matters.
Transaction at an undervalue
A transaction at an undervalue is a claim that can be brought by an administrator or liquidator (under section 238 Insolvency Act 1986) or trustee in bankruptcy (section 339 Insolvency Act 1986).
If the insolvent company or bankrupt has given away or transferred assets for free or less than the asset’s fair value, then this gives rise to a claim by the Insolvency Practitioner against the recipient of the assets. The recipient may be the required to return the relevant asset or pay damages equivalent to the value that should have been paid by the recipient for the asset.
Where the claim is by an administrator or liquidator, any transaction that took place in the 2 years prior to the onset of insolvency of the company may be the subject of a claim
Where the claim is by a Trustee in Bankruptcy any transaction that took place in the 5 years prior to the presentation of the bankruptcy petition may be the subject of the claim.
A director who allows his company to enter into transactions at an undervalue may also be personally liable for misfeasance or it is also potential unfit conduct for the purposes of directors’ disqualification.
Transactions Defrauding Creditors
Any transaction which takes place prior to bankruptcy which effectively puts assets out of the reach of creditors can be set aside by a trustee in bankruptcy. There are two differences between the provisions in the Act relating to transactions defrauding creditors and transactions at an undervalue. Firstly there is no time limit during which a transaction must have taken place for it to be recoverable as a transaction defrauding creditors and secondly in order for a challenge to be successful an intention to put assets beyond the reach of creditors must be shown which in itself can be difficult.
We regularly act in both bringing and defending antecedent transaction claims.
In accordance with section 127 of the Insolvency Act 1986 when a petition to wind up a company has been presented to the Court, any disposition of the company’s property that occurs after the date of presentation will be void if the company is ultimately wound up by the Court.
To prevent directors falling fowl of this section of the Insolvency Act it is advisable for them to obtain a validation order from the court in respect of all dispositions which are to be made by the company from the date the petition was presented.
A validation order will validate a disposition of a particular transaction and/or validate the actions of the company in the ordinary course of its business.
A director has a duty to take every step which a reasonably diligent person would take to minimise the potential loss to the company’s creditors once the director knew or ought to have concluded that there was no reasonable prospect that the company would avoid entering liquidation.
Once the company has entered liquidation, if it appears to the Court that a director has failed to comply with his duty, the Court may make an order requiring him to make a contribution to the company’s assets in accordance with section 214 of the Insolvency Act 1986.