BPP University College Of Professional Studies Limited (BPP)
Legal Practice Course
Business Law and Practice
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Summary Insolvency Procedures
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Business Law and Practice
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Insolvency Procedures-
IA ‘86
supplemented by the Insolvency (England and Wales) Rules 2016 - (‘IR ‘16’)
o Provides procedural rules
o Came into force on 6 April ‘17
IA ‘86 has been amended over the years by:
IA 2000
Enterprise Act ‘02**
CA ‘06
Small Business Enterprise and Employment Act ‘15
**the most significant reform -into force on 15 September 2003 (the ‘Relevant Date’).
The aims of the corporate insolvency reforms contained in the EA 2002 were:
To promote the rescue culture;
To increase entrepreneurship by giving prominence to collective insolvency
procedures over enforcement procedures; and
To remove the stigma attached to personal insolvency (bankruptcy) as a
result of running a failed business in order to encourage a more U.S. style
approach to entrepreneurship.
The focus of the EA ‘02 was on streamlining the administration procedure to
encourage company rescue and to restrict the use of administrative receiverships by
holders of qualifying floating charges. Summary of the reforms Appendix 2.
Aim of corporate insolvency law & the rescue culture-
Corporate insolvency relates to failing companies
The law tries to protect & balance the interest of competing creditors
o and to promote a culture where failing businesses are rescued and can
recover
o Creditors are likely to be able to recover more if businesses are
rescued
--
Obligations of directors-
To identify an insolvency situation -
Directors must continually review financial performance
Indicators of financial difficulty:
Company has unpaid creditors – who are placing the company under
increasing pressure to pay bills
, Company cannot use its overdraft for temporary relief, as it is fully drawn
o +bank refusing to extend further credit
Directors are the ones who decide to take action – they will need advice on their
duties & obligations under IA ‘86, & other law
-
Can directors ignore financial difficulties?-
IA ‘86 - dealing with fraudulent/ wrongful trading
Where the company enters into insolvent liquidations/ administration - Directors can
be personally liable to contribute to company’s assets
+ consider s172(3) – requiring directors to consider or act in the interests of
creditors of the company
S172 goes from ‘success of the company’ to ‘interests of creditors’ once the
company goes into insolvency
Hence a breach = liable to pay damages to the company under s. 212 IA
1986 which deals with misfeasance.
Directors may also be disqualified - Company Directors Disqualification Act 1986.
-
Should directors try and save the company/ the business?-
1) The board must decide whether to aim for the company’s survival
OR – 2) whether the company’s financial predicament is so great that, only
the company’s business can be rescued
o e.g. by the sale of the business and assets as a going concern to a
buyer
o If it is 2) - likely the company will have to enter into a formal
insolvency procedure to achieve it
There are turnaround strategies for the survival of the company
Restructuring the company debts
o Via a consensual agreement or a company voluntary agreement (CVA)
- a formal insolvency procedure
Company may need to bring in new management/ directors
They may appoint turnaround specialists, financial advisors
o They carry out an appraisal & if possible to rescue, establish an action
plan
, If the directors, assisted by their advisors, conclude that it is not possible to turn
around - there are various insolvency procedures available to deal with the
company’s predicament. It is these procedures which are examined in this Chapter.
--
Overview of corporate insolvency procedures-
in practice the choice of procedure is often influenced by the company’s secured
creditors and particularly those who hold a “qualifying floating charge” over the
company’s assets.
SUMMARY OF CORPORATE INSOLVENCY
PROCEDURES
Options for the Company
Main aim for the Company Applicable insolvency procedure
Aim is to save the company by Consensual agreement binding only
negotiation with one or more major on those creditors which agree to it
creditors e.g. under which the creditors (no insolvency procedure is used)
agree to give the company longer to pay
and/or write off part of the liabilities
which the company owes them
Seek a compromise or arrangement Formal arrangement / CVA or scheme
which is binding on all creditors including of arrangement (sometimes combined
those who vote against it or do not vote with an administration)
at all
Where the company cannot be saved but Administration
it has a viable business which can be
saved and the company needs protection
from hostile creditor action to achieve
this. Alternatively, the company wishes
to seek a compromise with creditors by
way of a scheme of arrangement or CVA
but for practical or legal reasons, it first
needs to enter into administration
Where neither the company nor its Liquidation (compulsory or creditors’
business can be saved, to wind up the voluntary)
company. A liquidation can often follow
an administration as well (discussed
below)
Options for Secured Creditors
Main aim for Secured Creditors Applicable insolvency procedure
Agree to a compromise or arrangement Consensual agreement (binding only
with the debtor (e.g. a rescheduling of on those who agree to it); no
the debt so the company has longer to insolvency procedure is used
pay and/or write off of part of the debt) --------
Scheme or (rarely) CVA
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