Insolvency

We are experienced in both corporate and personal insolvency and work closely with a number of Licensed Insolvency Practitioners. We provide strategic advice with regards to restructuring financial affairs in a cost efficient manner.

Our experience includes, but is not limited to, the following:

  • Compulsory liquidations;
  • Administrations;
  • Pre-packs; and
  • Bankruptcy.

Our clients have the benefit of knowing that they will receive a personal and proactive service in often complex and challenging insolvency scenarios.

Should you need any insolvency legal advice then please contact us on 01274 924200 or email us at insolvency@bakerreign.co.uk and a member of our insolvency team will contact you.


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Compulsory liquidation

A compulsory liquidation is effectively the winding up of a company by the Court. The circumstances under which a company can be wound up by a Court include the following:

  • By its creditors;
  • The statutory demand; and
  • By certain other parties.

Creditors

This is most commonly used by a creditor who is owed at least £750 by the debtor company and they have been unable to successfully recover the monies owed to them by the other debt recovery methods. The creditor may issue a petition upon the following grounds:

  • They had served a statutory demand and the 21 day period to receive payment has expired;
  • They have an execution or enforcement process after obtaining judgement which is unsatisfied; or
  • They are able to prove to the Court that the debtor company is unable to pay its debts as they fall due which is pursuant to the definition of insolvency under section 123 of the Insolvency Act 1986.

Statutory demand

This is a written notice which must be in the prescribed form for a debt in excess of £750 which demands payment of the debt owed by the debtor company. The statutory demand includes the following details:

  • The amount owed;
  • The date by which payment must be made;
  • The consequences of ignoring the statutory demand;
  • Details of whom the debtor can contact regarding the statutory demand; and
  • The right of the debtor company to dispute the statutory demand.

The debtor then has 21 days to satisfy the demand. Alternatively, the debtor has 18 days to have the statutory demand set aside or cancelled.

If the statutory demand is ignored then the pursuing business may issue a winding up petition against the debtor company.

It must be noted that a statutory demand is not always necessary and therefore not compulsory before issuing a petition (unlike bankruptcy petitions). However, the statutory demand is a good method of proving that the debtor company is unable to pay its debt as and when they fall due thereby creating a presumption of insolvency.

Other parties

The petition can be issued by the company when it satisfies the statutory definition of insolvency or:

  • The Court believes it to be just and equitable to do so;
  • When the company has filed an interim moratorium for a company voluntary arrangement which has expired and there is no compulsory voluntary arrangement approved; or
  • Other prescribed circumstances.

Winding up a company

As long as the share capital of the debtor company does not exceed £120,000 the petition to wind up the debtor company can be issued in the County Court. Alternatively the High Court has the jurisdiction to wind up any company in England and Wales.

The petition to wind up the company must be in the prescribed form and contain certain information. It will also need to be verified by a statement of truth by the petitioner.

Pursuant to the rules of service set out in rule 4.8 of the Insolvency Act 1986 a sealed copy of the petition must be served on the company. There must be a proof of service filed at the Court and this is done by way of a certificate of service.

Following this the petition would then be advertised in the London Gazette. This would take place at least seven days after service and no less than seven days before the petition is to be heard. This allows other interested parties to become aware of the petition. However, as other parties may become aware then there is a potential effect on the debtor company’s ability to trade as other creditors may no longer wish to offer credit terms to it.

Credit institutions run checks against the London Gazette daily and once the debtor company is noted as having a petition advertised against it this will ordinarily freeze the debtor company’s bank account pending the result of the winding up petition. This can cause the debtor company some serious financial difficulties as they would, as examples, be unable to pay any suppliers, creditors or staff wages. It is however possible to make an application to Court to allow the bank account to be used and this is done by way of a validation order. However, it is very likely to be restricted access to the debtor company’s bank account. Therefore a debtor company which ignores the winding up petition, no matter how dubious the claim, can face serious financial consequences should it not be dealt with.

There are a number of requirements for the petition to be validly heard. However, it must be noted that any creditor can appear at the petition. Therefore, even if the debtor company comes to an arrangement with the original petitioning creditor there is nothing to stop another creditor appearing and taking over the petition. Therefore, it could potentially be the case that all of the debtor company’s creditors appear at Court and it would have to pay them all to ensure that the petition goes away. Obviously, this can put the debtor company under considerable financial pressure.

A winding up order will be granted by the Court if the Court is satisfied that one of the grounds for doing so has been met and all of the formal requirements have been complied with.

The consequence of winding up the company

Presenting a petition to wind up a debtor company does not trigger an automatic stay of proceedings against it. However, an application can be made by the company, creditors or contributories for a stay to be put in place by the Court.

Unlike with a creditors voluntary liquidation, if a winding up order has been made or a provisional liquidator has been installed, then there would be an automatic stay in relation to cases against the company. However, it is still open to any party to litigation with the company to lift the stay by making an application to Court.

All unsecured creditors would rank equally on a formal insolvency and therefore any creditor should consider the merits of continuing with any proceedings against the debtor company as it would not improve their ranking in terms of priority. Any such creditors may also not be able to recover their costs of such action even if they were successful in the pursuit of their claim.

Administration

Administration is a procedure which allows a company breathing space to enable it to be rescued or restructured or that it allows for a better outcome than liquidation for its creditors.

The administrator of the company is an insolvency practitioner who has been appointed in accordance with the Insolvency Act 1986 (“IA 1986”) to manage the company’s business and property. The role of the administrator is to achieve one of the three purposes of administration, namely:

  • To rescue the company as a going concern;
  • To achieve a better result for the company’s creditors as a whole than would be likely to be achieved if the company were wound up; or
  • To realise property in order to make a distribution to one or more secured or preferential creditors.

The company should not remain in administration if one of the three purposes is reasonably capable of being achieved. At this point the administrator must apply to the Court to end the administration.
A company should be in administration no longer than a year. However, if the administration is to last longer than this time then an application for an extension of time needs to be made to the Court. The application will need to show good reason for the extension (or for a first extension, the consent of the creditors for an additional six months).

The administrator of the company can be appointed either by the Court or using the out of Court procedure.

Out of Court appointment

In this instance the administrator can be appointed by:

  • The Company;
  • The directors of the company; or
  • A qualified floating charge holder (“QFCH”).

The company or its directors can make an application under the out of Court process except when:

  • A winding up petition has been presented and not yet heard. However, an administrator can be appointed if the notice of intention to appoint was filed prior to the winding up petition being presented;
  • An administration application has been presented and has not yet been disposed; or
  • There is an administrative receiver in office.

There must also be at least 12 months since the ending of a previous administration or a company voluntary arrangement.

If there is a QFCH and they have a valid floating charge over the whole or substantially the whole of the company’s property then they may make an application under the out of Court route. However, the QFCH must make an application to Court where:

  • An administrator has already been proposed by the company or its directors;
  • The company is already in a winding up, however, the application to Court can only be made if it the company was wound up by a creditors voluntary liquidation (“CVL”); and
  • There is a provisional liquidator in place or an administrative receiver.

Should the out of Court appointment method be used then the process is laid out in the Insolvency Rules 1986 SI 1986/1925 (“IR 1986”). It is imperative that this process is closely followed otherwise the appointment is likely to be invalid. Should there be any doubt as to the validity of the appointment or the view that that the appointment may be challenged then it is sensible to instead proceed down the Court appointment route.

Court appointment

The appointment via Court can be made in much wider circumstances than those for an out of Court process. The parties that may make an application for the appointment of an administrator are:

  • The directors;
  • The company;
  • One or more QFCH;
  • An officer designated under section 87A of the Magistrates Court Act 1980;
  • A combination of all of the above; or
  • Other provisions within the IA 1986 or other statutes allow others to make the application.

Paragraph 21 of Schedule B1 of the IA 1986 enables the directors of the company to make an application for an out of Court administration. However, in some instances the permission of the Court is required, namely:

  • A winding up petition has been presented and not yet heard. However, an administrator can be appointed if the notice of intention to appoint was filed prior to the winding up petition being presented;
  • An administration application has been presented and has not yet been disposed; and
  • There is an administrative receiver in office.

As is the case with an out of Court appointment of an administrator a QFCH must fulfil certain criteria prior to making an application to Court which must ascertain the validity of the qualifying floating charge. In addition to this a QFCH must make an application to appoint an administrator through the Court procedure if:

  • There is a provisional liquidator in place or an administrative receiver;
  • In certain circumstances there is already a liquidator in place; or
  • If there is a current administration application by either the company or its directors and the QFCH wants to install their own administrator.

Effect of administration

Putting a company into administration allows it to take advantage of the statutory moratorium. This enables the company to have some breathing space which in turn allows for either a rescue or a restructure to take place without dealing with the immediate pressure from creditors. The moratorium is effective once the administration order comes into place. The moratorium applies to the insolvency proceedings and also other legal processes. It should be noted that there is also an interim moratorium upon the issuing or filing of the original administration application. This also provides for the dismissal of any winding up petitions which are pending. It also provides for the dismissal, in most cases, of any existing administrator or administrative receivership.

The administrator

The administrator of the company is an insolvency practitioner who has been appointed in accordance with the IA 1986 to manage the company’s business and property. The role of the administrator is to achieve one of the three purposes of administration. However, it is important to note that the administrator acts for all of the creditors not just those by whom they were appointed. Whether or not the administrator was appointed by the Court route or out of Court process they are still an officer of the Court.

Whilst acting as the administrator of a company they act as its agent. As such the administrator does not assume personal liability for any contracts that they enter into. However, for a robust approach the administrator will expressly state that the contracts are signed without personal liability for the them.
Pursuant to paragraph 100 (2) of Schedule B1 of the IA 1986 joint administrators can have specific roles and duties assigned to them including filing obligations and these must be set out clearly with any administration application. This is the case with the appointment route being conducted through the Court process or the out of Court process.

Irrespective of how the administrator is appointed their powers remain the same and it must be noted that these powers are extremely wide. It should be noted that although there are specific powers outlined in the IA 1986 they are not limited in scope.

The administrator can exercise all of the powers set out in schedule B1 of the IA 1986. However, they can also exercise all of the powers which are given to administrative receivers to enable them to achieve one of the three purposes of administration which is pursuant to schedule 1 of the IA 1986. Those powers are extremely wide and enable the administrator to do anything necessary to carry on the business and to realise the company property.

Although it is possible to either remove or replace an administrator, by either a creditor or company members application pursuant to paragraph 88 of Schedule B1 of the IA 1986, the Courts are reluctant to do so. This is because of the inevitable delays and increase in costs.

Ending the administration

The administration will come to an automatic end at the end of the 12 month period unless another exit has been taken. The other exits depend on the circumstances of the administration. However, other exits include either putting the company into liquidation, a company voluntary arrangement or moving to dissolve the company.

Pre-packs

A pre-pack is where the sale of the business or assets has been arranged in advance of the company entering into administration. Therefore, once the administrator is appointed they will quickly complete the sale. As a result of this the company in administration would not need to incur the costs of trading and the associated costs.

Under a pre-pack the terms of sale are agreed before the administrator is appointed. However, where a pre-pack is agreed it is usually the case that the level of due diligence that has been conducted by the proposed buyer is less than that conducted during a standard corporate acquisition. The administrator will sell the assets sold as seen as not with the benefit of any warranties and guarantees. Should any be provided, which will be rare, then these will be extremely limited in scope.

Key characteristics of a pre-pack

Due to the nature of a pre-pack these are negotiated relatively quickly and completed within a short period of time.

As pre-packs are intended to be faster than the standard administration they are often less expensive and can provide a greater return to the creditors.

Because of the circumstances surrounding the pre-pack it is unlikely that the business will have been widely advertised due to the potential knock on effects to other stakeholders. Usually the sale is to the existing directors.

There must be formal independent valuations of the assets and goodwill of the business and it will be these valuations against which any offer needs to be made.

Although financing a pre-pack is key, it is imperative that existing suppliers are on board. If existing suppliers are not in agreement with the pre-pack then it is likely that the new company will fail.

Potential issues of a pre-pack

One of the main criticisms of pre-packs are that they are seen as done deals by the administrator and the existing management. This is because the new company will leave behind the liabilities from the company in administration and the new company is free to trade without those liabilities.

Because of the negativity surrounding pre-packs the Joint Insolvency Committee issued a new Statement of Insolvency Practice 16, often known as SIP 16. Under this the administrator is under a duty to provide certain information to creditors after the conclusion of the pre-pack sale.

Often a pre-pack is the company’s only option other than liquidation and therefore the Courts are usually supportive of pre-packs as long as they provide a better return to creditors than if the company simply went into liquidation.

However, a creditor who was unhappy with the pre-pack can challenge the sale. The challenge would be brought under the grounds that the administrator did not conduct their role properly and caused the creditor an unfair harm due to such conduct.

Considerations for the directors

Independent legal advice should by sought by the directors of the company if they are considering a pre-pack. This is because whilst they are considering a pre-pack sale they are under a duty to mitigate the company’s losses to its creditors. The directors also need to consider any potential liability issues for wrongful trading pursuant to section 214 of the IA 1986 and also with regards to any antecedent transactions pursuant to the IA 1986. The directors would also need to be conscious of any potential liability issues due to the use of a prohibited name pursuant to section 216 of the IA 1986.

Costs of the pre-pack

The pre-administration costs are to be paid as an expense of the administration. Therefore the costs would be treated in the usual priority order in relation to administration expenses.

Bankruptcy

Bankruptcy is effectively an insolvency process for individuals. Bankruptcy for an individual starts on the date the bankruptcy order is made by the Court which follows the presentation of a bankruptcy petition.

The bankruptcy order has the effect of freeing the bankrupt from their debts. However, as a result of this the trustee in bankruptcy will divide certain assets belonging to bankrupt to their creditors who have a valid an approved claim pursuant to section 285 of the Insolvency Act 1986 (“IA 1986”).

Making someone bankrupt

A prescribed process must be followed to make someone bankrupt. One of the first things that must be done is that a bankruptcy petition must be filed at Court pursuant to section 271 of the IA 1986.

In accordance with section 264 of the IA 1986 the bankruptcy petition can be presented by the following people:

  • A creditor who is owed a liquidated or undisputed debt of at least £5,000. Before the creditor is able to file the bankruptcy petition they must have served the debtor with a statutory demand or alternatively an enforcement process has been returned unsatisfied. This is in accordance with section 267 of the IA 1986;
  • The debtor who presents their own petition in accordance with section 272 of the IA 1986;
  • The supervisor of the debtors individual voluntary arrangement (“IVA”) where the IVA is in default or the debtor has provided false information. This is in accordance with section 276 of the IA 1986; and
  • The Financial Conduct Authority or the Prudential Regulation Authority where the debtor is unable to pay a debt arising from a regulated activity. This is pursuant to section 372 of the Financial Services and Markets Act 2000.

The bankruptcy proceedings can be brought against individuals who fall within the jurisdiction of the English and Welsh Courts. Ordinarily this means that the debtors main interests are located in this jurisdiction and they are either domiciled or conducting business within the jurisdiction. Alternatively, the debtor can be personally present in the jurisdiction on the day the bankruptcy petition is presented against them.
The key component in any bankruptcy petition is that the debtor is unable to pay their debts. Therefore, by using the precursor of serving the debtor with a statutory demand, which is a statutory requirement, and the debtor not discharging the debt or an enforcement process is returned unsatisfied this will be presumed. However, if the debtor is petitioning for their own bankruptcy then they must declare that they are unable to pay their debts.

Prior to the Court making the debtor bankrupt certain requirements need to be complied with, namely:

  • The bankruptcy petition will need to be filed;
  • A written statement confirming that the statements in the bankruptcy petition are true; and
  • The bankruptcy petition will need to be served on the debtor. This is only a requirement if the bankruptcy petition is not presented by the debtor themselves.

The bankruptcy petition must clearly set out the nature and the particulars of the debt and also be for the minimum level for bankruptcy. The bankruptcy petition should be presented to the debtor’s local court to where they either live or carry on their business and has insolvency jurisdiction. Once the Court is satisfied that the requirements have been met the Court can then make the bankruptcy order.

Disputed debts

A bankruptcy petition should be based upon an undisputed liquidated debt. Nonetheless, there will be circumstances where the debt is disputed by the debtor. This issue is normally dealt with during the statutory demand process.

The debtor is able to file and serve a notice of opposition to the bankruptcy petition. This must be done at least five business days before the hearing of the petition. The Court will then consider the nature of the debt and determine whether the debt is due by the petitioner before making the bankruptcy order. As part of this process the Court may make directions under which evidence is required to substantiate the debt.

After the bankruptcy order is made

The Court will draft the bankruptcy order and it will contain a notice that the bankrupt must attend on the official receiver. The official receiver will ask the bankrupt questions in relation to the events and circumstances giving rise to the bankruptcy order. The bankrupt will also be required to provide to the official receive details of all of their assets and liabilities.

Following the making of the bankruptcy order the official receiver will place an advertisement of the bankruptcy order in both the London gazette and also a newspaper local to where the bankrupt lives or carries on business. The official receiver will also send notice of the bankruptcy order to the chief land registrar. The details of the bankrupt will also be placed on the individual insolvency register.

The effect of bankruptcy and its duration

The assets and property which belong to the bankrupt will, upon the making of the bankruptcy order, vest in the trustee in bankruptcy. The trustee in bankruptcy will then realise the assets in order to pay a dividend to the creditors. In return for the assets vesting in the trustee in bankruptcy the bankrupt no longer has a responsibility to pay those debts. This is pursuant to section 279 of the IA 1986. The bankruptcy order also has the following effects:

  • Any proceedings against the bankrupt or their property are stayed. However, if a creditor wants to bring or continue a claim they may only do so with the leave of the Court;
  • The bankrupt cannot act as a director of a company or take part in the management, formation or promotion of a company without the permission of the Court; and
  • A bankrupt must not obtain credit above the prescribed amount without first declaring that they are an undischarged bankrupt.

Annulment of bankruptcy

An annulment is effectively an order which cancels the original bankruptcy order. It is an order made under section 282 of the IA 1986. However an application for an annulment can only be made under certain grounds.

Grounds for an annulment

Pursuant to section 282 of the IA 1986 there are three grounds under which the Court can annul the bankruptcy order. These are:

  • Pursuant to section 282 (1) (a) of the IA 1986, if it appears to the Court that, on any grounds existing at the time when the bankruptcy order was made, the order ought not to have been made;
  • Pursuant to section 282 (1) (b) of the IA 1986, if it appears to the Court that, to the extent required by the rules, the bankruptcy debts and the expenses of the bankruptcy have all, since the making of the bankruptcy order, been either paid or secured to the satisfaction of the Court; or
  • Pursuant to section 261 of the IA 1986, where an undischarged bankrupt enters into an individual voluntary arrangement with their creditors.

Effect of an annulment

Effectively the annulment order restores the person to what their position was prior to the making of the bankruptcy order. Therefore the debtor will still remain liable for all of the debts and any property which was vested in the trustee in bankruptcy pursuant to the bankruptcy order will revert back to the debtor pursuant to section 282 (4) of the IA 1986.