Insolvency Procedures: Procedure + Options + Order of Priority
Aim of corporate insolvency law is to protect and balance the interests of competing creditors.
Enterprise Act 2002 (reforms of corporate insolvency)
Aims to promote the rescue culture – failing businesses can be rescued + recover.
To increase entrepreneurship by giving prominence to collective insolvency procedures (CVA’s / Schemes of
arrangement / liquidation), rather than enforcement procedures (receivership – benefits creditors only etc)
To remove the stigma attached to personal insolvency
All Creditors are Equal under statute. However, Order of Priority prefers certain creditors.
Consensual = Contract Based Deals Pre-Insolvency Procedure
A company can negotiate + agree deals (reach consensual agreement) with one or more of its creditors on the basis
of a contractually binding agreement. Binding only on those creditors who agree to it.
Under which debtor may have longer period to pay + less to pay + the payment terms are otherwise changed in a
way beneficial to debtor.
Deals not underpinned by IA 1986 + no formal insolvency procedure governed by contract law.
Benefit = Easy, quick, and cheap way for company to restructure liabilities.
Disadvantage = Difficult to reach agreement with all the necessary creditors at the same time.
Solution = Company may first need to obtain a pre-insolvency moratorium or enter into standstill agreement (may be
preferred in relation to Bank creditors – see below) Creditors agree not to sue debtor / take enforcement action of
its security, during negotiations, before commencing negotiations with a view to achieving consensual restructuring.
Pre-Insolvency Moratorium Pre-Insolvency Procedure
CIGA 2020 (new) = The Directors can + should, aim to stabilise the company’s position, before pursuing any
corporate insolvency procedures (below), via a pre-insolvency Moratorium East to obtain: Out of Court procedure.
Prevents hostile creditor action (e.g. enforcement of security)
Directors should file the required documents at court + get monitor on board (need monitors support) who is
prepared to declare (sign declaration) to state, that it is likely that the company can be ‘rescued as a going
concern’.
Purpose = the Moratorium will provide ‘breathing space’ for the Directors to prepare and negotiate any formal
arrangements (CVA, consensual deal etc) + to achieve solvent restructuring + avoid administration or liquidation.
- E.g. Negotiate the terms of a CVA proposal with unsecured creditors (such as Landlords), without risks.
- E.g. Prevents Landlords from forfeiting their leases + secured creditors from enforcing their security against
the companies’ assets + bar on litigation + avoid repossession of leased equipment + retention of title stock.
Effectively halts the position of the company from the date of notice to the date of voting.
BANKS It does not prevent usual contractual remedies / rights under loan agreements with Banks e.g.
termination of facilities + acceleration of loans + demand payment (even tho PIM obtained).
Disadvantage = PIM does not work without lender support (in advance) = see below for without holiday PIM debt.
DURATION
Can last up to 40 business days. Originally 20 Bus days + can be extended by Directors further 20. Or can last up
to 1 year with a court order or Creditor approval.
THREE Categories of debt
(1) Pre-moratorium debt with payment holiday + (2) Pre-moratorium debt without payment holiday + (3)
Moratorium debts include: monitors fees + employees + rent + amount owed for supply of goods/services
during Moratorium.
A pre-moratorium debt is a debt which existed / incurred before the pre insolvency moratorium began = This will
include most debts / liabilities of a company.
Holiday with payment holiday, company doesn’t have to pay them whilst the pre-insolvency moratorium lasts.
Without holiday Bank debt / Loan agreements. Idea that companies cannot use pre-insolvency moratorium to
avoid paying debts to banks. Have to pay debts due in accordance with terms of loan agreement.
, Company must pay the last 2 categories when due. If cannot (e.g. pay bank loan), monitor must bring moratorium
to an end
Corporate Insolvency Procedures (Options for Failing Companies)
Formal Arrangement (Using Statutory Procedures)
Advantage of Formal Arrangement:
It does not need to be agreed to by all creditors.
Consensual agreement And, If the statutory majorities of creditors vote in favour of arrangement, it is
legally binding on all creditors, even if they voted against it or did not vote on it at all.
Statutory Plan: All 3 procedures (restructuring plan + scheme’s + CVA’s) = existing management stays in
place.
No Moratorium unless company first obtains a pre-insolvency moratorium or goes into administration.
Pre-insolvency Moratorium out of court – initial period 20 days (but extendable for up to 1 year, or longer with
court consent).
Means company is not subject to creditor enforcement action.
Company uses time afforded to draft, negotiate + propose either of 3 options.
Restructuring Plan
New statutory compromise under: CIGA 2000 (Corporate Insolvency and Governance Act 2020) – Forces a
compromise on creditors where the requisite majority of creditors approve it. BIND SECURED CREDITORS
Procedurally = resembles schemes of arrangement
Voting = resembles CVA’s (class of creditors, at least 75% of value in class in favour, no majority in no req).
Advantage = If only want to bind certain Creditors (not all) + flexible.
Court driven process – so companies may prefer to use CVA’s (when seeking compromise from unsecured
creditors only. Restructuring plan not commonly used for unsecured creditors.
Scheme of Arrangement
S.985 – S.901 CA 2006 = A complex formal arrangement, or compromise, made between the company and one
or more classes of its creditors. BIND SECURED CREDITORS.
Requires court’s involvement (court driven) + so expensive schemes of arrangement tend to be used only
for (i) complex insolvencies or restructurings – where many tiers of secured creditors (bind secured creditors
unlike CVA’s. (ii) So used where the company wishes to compromise secured debt and.
Procedural Requirements
Compromise must be agreed by 75% or three-quarters in value of each class, and
A majority in number (50%) of each relevant class of creditors at a meeting, and then sanctioned by the
court.
Once the scheme has court sanction, it will bind all creditors including any dissenting or unknown creditors.
CVA’s = Company Voluntary Arrangements
PART 1 = S.1 - 7 Insolvency Act 1986 = Where UNSECURED LIABILITIES / DEBTS only are to be
compromised.
A CVA is a contract between company + creditors – used to put in place a restructuring or compromise
arrangement of the companies unsecured liabilities, to address companies’ financial difficulties.
Purpose = to rescue the company or better realisation of assets on winding up.
Creditors can agree to accept only a proportion of the debt owed to them in full and final payment or agree to
new payment terms going forward.
- Creditor Will not get back everything they are owed when they are owed it (E.g. 50p out of £1). Only get
back in years’ time etc.
It is a statutory contract – not a normal contract. Because you do not need 100% consent (this is because not
every creditor will sign up to it).
Aim of corporate insolvency law is to protect and balance the interests of competing creditors.
Enterprise Act 2002 (reforms of corporate insolvency)
Aims to promote the rescue culture – failing businesses can be rescued + recover.
To increase entrepreneurship by giving prominence to collective insolvency procedures (CVA’s / Schemes of
arrangement / liquidation), rather than enforcement procedures (receivership – benefits creditors only etc)
To remove the stigma attached to personal insolvency
All Creditors are Equal under statute. However, Order of Priority prefers certain creditors.
Consensual = Contract Based Deals Pre-Insolvency Procedure
A company can negotiate + agree deals (reach consensual agreement) with one or more of its creditors on the basis
of a contractually binding agreement. Binding only on those creditors who agree to it.
Under which debtor may have longer period to pay + less to pay + the payment terms are otherwise changed in a
way beneficial to debtor.
Deals not underpinned by IA 1986 + no formal insolvency procedure governed by contract law.
Benefit = Easy, quick, and cheap way for company to restructure liabilities.
Disadvantage = Difficult to reach agreement with all the necessary creditors at the same time.
Solution = Company may first need to obtain a pre-insolvency moratorium or enter into standstill agreement (may be
preferred in relation to Bank creditors – see below) Creditors agree not to sue debtor / take enforcement action of
its security, during negotiations, before commencing negotiations with a view to achieving consensual restructuring.
Pre-Insolvency Moratorium Pre-Insolvency Procedure
CIGA 2020 (new) = The Directors can + should, aim to stabilise the company’s position, before pursuing any
corporate insolvency procedures (below), via a pre-insolvency Moratorium East to obtain: Out of Court procedure.
Prevents hostile creditor action (e.g. enforcement of security)
Directors should file the required documents at court + get monitor on board (need monitors support) who is
prepared to declare (sign declaration) to state, that it is likely that the company can be ‘rescued as a going
concern’.
Purpose = the Moratorium will provide ‘breathing space’ for the Directors to prepare and negotiate any formal
arrangements (CVA, consensual deal etc) + to achieve solvent restructuring + avoid administration or liquidation.
- E.g. Negotiate the terms of a CVA proposal with unsecured creditors (such as Landlords), without risks.
- E.g. Prevents Landlords from forfeiting their leases + secured creditors from enforcing their security against
the companies’ assets + bar on litigation + avoid repossession of leased equipment + retention of title stock.
Effectively halts the position of the company from the date of notice to the date of voting.
BANKS It does not prevent usual contractual remedies / rights under loan agreements with Banks e.g.
termination of facilities + acceleration of loans + demand payment (even tho PIM obtained).
Disadvantage = PIM does not work without lender support (in advance) = see below for without holiday PIM debt.
DURATION
Can last up to 40 business days. Originally 20 Bus days + can be extended by Directors further 20. Or can last up
to 1 year with a court order or Creditor approval.
THREE Categories of debt
(1) Pre-moratorium debt with payment holiday + (2) Pre-moratorium debt without payment holiday + (3)
Moratorium debts include: monitors fees + employees + rent + amount owed for supply of goods/services
during Moratorium.
A pre-moratorium debt is a debt which existed / incurred before the pre insolvency moratorium began = This will
include most debts / liabilities of a company.
Holiday with payment holiday, company doesn’t have to pay them whilst the pre-insolvency moratorium lasts.
Without holiday Bank debt / Loan agreements. Idea that companies cannot use pre-insolvency moratorium to
avoid paying debts to banks. Have to pay debts due in accordance with terms of loan agreement.
, Company must pay the last 2 categories when due. If cannot (e.g. pay bank loan), monitor must bring moratorium
to an end
Corporate Insolvency Procedures (Options for Failing Companies)
Formal Arrangement (Using Statutory Procedures)
Advantage of Formal Arrangement:
It does not need to be agreed to by all creditors.
Consensual agreement And, If the statutory majorities of creditors vote in favour of arrangement, it is
legally binding on all creditors, even if they voted against it or did not vote on it at all.
Statutory Plan: All 3 procedures (restructuring plan + scheme’s + CVA’s) = existing management stays in
place.
No Moratorium unless company first obtains a pre-insolvency moratorium or goes into administration.
Pre-insolvency Moratorium out of court – initial period 20 days (but extendable for up to 1 year, or longer with
court consent).
Means company is not subject to creditor enforcement action.
Company uses time afforded to draft, negotiate + propose either of 3 options.
Restructuring Plan
New statutory compromise under: CIGA 2000 (Corporate Insolvency and Governance Act 2020) – Forces a
compromise on creditors where the requisite majority of creditors approve it. BIND SECURED CREDITORS
Procedurally = resembles schemes of arrangement
Voting = resembles CVA’s (class of creditors, at least 75% of value in class in favour, no majority in no req).
Advantage = If only want to bind certain Creditors (not all) + flexible.
Court driven process – so companies may prefer to use CVA’s (when seeking compromise from unsecured
creditors only. Restructuring plan not commonly used for unsecured creditors.
Scheme of Arrangement
S.985 – S.901 CA 2006 = A complex formal arrangement, or compromise, made between the company and one
or more classes of its creditors. BIND SECURED CREDITORS.
Requires court’s involvement (court driven) + so expensive schemes of arrangement tend to be used only
for (i) complex insolvencies or restructurings – where many tiers of secured creditors (bind secured creditors
unlike CVA’s. (ii) So used where the company wishes to compromise secured debt and.
Procedural Requirements
Compromise must be agreed by 75% or three-quarters in value of each class, and
A majority in number (50%) of each relevant class of creditors at a meeting, and then sanctioned by the
court.
Once the scheme has court sanction, it will bind all creditors including any dissenting or unknown creditors.
CVA’s = Company Voluntary Arrangements
PART 1 = S.1 - 7 Insolvency Act 1986 = Where UNSECURED LIABILITIES / DEBTS only are to be
compromised.
A CVA is a contract between company + creditors – used to put in place a restructuring or compromise
arrangement of the companies unsecured liabilities, to address companies’ financial difficulties.
Purpose = to rescue the company or better realisation of assets on winding up.
Creditors can agree to accept only a proportion of the debt owed to them in full and final payment or agree to
new payment terms going forward.
- Creditor Will not get back everything they are owed when they are owed it (E.g. 50p out of £1). Only get
back in years’ time etc.
It is a statutory contract – not a normal contract. Because you do not need 100% consent (this is because not
every creditor will sign up to it).
