Lectures
Lecture 1: Corporate Insolvency (I)
Structure of lecture
1) 1. An Introduction to Corporate Insolvency
2) 2. Insolvency Legislation
3) 3. When is a Company ‘insolvent’?
4) 4. Corporate Rescue
5) 5. Liquidation
Introduction
1) Why do companies face fin difficulties or become insolvent
2) Under capitalisation (not enough capital to engage in proj, hence hi debt, over
leveraging, thus unable to pay debts)
3) Too rapid growth
4) Not as competitive
Sources of insolvency law
1) ! The Insolvency Act 1986 (replaced IA 1985).
a) Also see Cork Committee Report
2) ! Insolvency Rules 2016 (effective 04/2017)
3) ! Company Directors’ Disqualification Act 1986 [CDDA] note changes by SBEEA 2015]
4) ! Companies Acts 1989 and 2006 (Part VII)-for stability of financial markets
5) ! FSMA 2000
6) ! Insolvency Act 2000 and Enterprise Act 2002-abolition of administrative receivership
7) ! CIGA 2020
Definition of insolvency
,Insolvency and the role of credit
1) What is to be insolvent?
2) Being unable to pay one’s debts
3) S.123
a) The general / specific tests
b) Not able to pay its debts as they fall due
Company is insolvent or on the verge of insolvency… options
1) Liquidation
a) Cessation of trading
b) Sale of assets on a piecemeal basis
2) Trade out of difficulties
a) Restructuring of liabilities
3) Sale of assets or business on better terms than immediate winding up
When is a company insolvent?
1) When it is unable to pay its debt
2) If a company is unable to pay its debts … can it continue to trade, can its creditors take
steps to enforce payment?
3) ! At which point do legal consequences attach (i.e. collective procedure)?
a) ◦ S.240(3) the “onset of insolvency”
b) ◦ It is with the advent of formal insolvency proceedings that company’s inability to
pay debts becomes material
c) ◦ Winding up order or administration gives retroactive legal significance to an
earlier state of insolvency which at the time it arose had no impact in law
Definition of inability to pay debts
1) IA 1986
a) S.123
i) Specific tests
(1) 1(a) -> £750 test
(2) 1(b) -> if decree of court, and creditor is unable to be satisfied
then can be deemed to be unable to pay debts
ii) General tests
(1) s.1(e) -> cash flow test
(2) S.2 -> balance sheet test
,Why is it important to determine whether a company is insolvent or not
1) Prerequisite for the initiation of formal insolvency proceedings.
2) ! If a company is insolvent when it enters into a certain transaction and formal insolvency
proceedings are commenced within a specified time, that transaction may be open to
challenge;
3) ! Whether a company is solvent or not will determine whether a voluntary liquidation is
controlled by its creditors or members;
4) ! Directors also owe certain duties once a company is insolvent;
5) ! Certain company law procedures may only be taken by solvent companies and the
directors may need to make a statutory declaration of solvency.
Process
1) There are two types of process that a company might enter when in financial difficulty: !
a) (1) trying to rescue the company by reaching agreement about debts with
creditors:
i) ◦ Company voluntary arrangement or ◦
ii) Administration ◦ Short-term stand alone moratorium ◦
iii) There are also restructurings available (when solvent or insolvent) such
as schemes of arrangement and the new Part26A Restructuring Plan !
b) (2) dissolution of the company through winding-up
i) ◦ *members’ voluntary winding-up
ii) ◦ * creditors’ voluntary winding-up
iii) ◦ * compulsory winding-up
(1) Winding up in public interest
Types of insolvency procedures
1) Winding up/liqu
a) Voluntary WU
b) Compulsory WU
i) Winding up in public interest
2) Alternatives to liqui
a) Informal arrangements
b) Administration
c) Stand alone moratorium (CIGA introduced)
d) Administrative receivership
e) Statutory compromises, compositions, and arrangements with creditors (CVAs,
Schemes of Arrangement)
, CORPORATE RESCUE
Corporate Rescue
1) Aims:
a) ◦ to protect and balance the interests of competing creditors;
b) ◦ deal with the directors responsible;
c) ◦ promote rescue and recovery.
2) ! Awareness that recoveries for creditors are likely to be higher if the business can be
rescued or restructured rather than closed down and the assets sold.
3) ! Rescue culture that favours responsible risk takers.
4) ! Companies in financial difficulties can be nursed back to health, with protection from
individual creditor action where necessary.
Rescue Mechanisms
1) Administrations
a) Where a company may be rescued or reorganized or its assets realized under
the protection of a statutory moratorium;
b) • Administrator is appointed;
c) • The Enterprise Act introduced an alternative out-of-court route;
d) • Administrator to propose a course of action for rescuing the company together
with steps that will be taken to obtain the approval of the creditors.
e) • Pre-Packs: prepared for sale to a selected buyer
2) CVAs
a) Company and its creditors come to some sort of agreement, which is
implemented and supervised by an insolvency practitioner ;
b) • Directors (or Administrator) may initiate a CVA by making a proposal to the
company and its creditors;
c) • May be used in conjunction with administration where a moratorium gives the
company breathing space to agree any proposals with creditors.
3) Schemes of arrangement
a) A scheme of arrangement must be sanctioned by the court
b) • Where a compromise or other arrangement with creditors (or any class of
creditors) or members (or any class of members) is made under Part 26 of the
Companies Act 2006 which is binding if the appropriate majorities of each class
of creditors/members agree;
4) Short term standalone moratorium
Lecture 1: Corporate Insolvency (I)
Structure of lecture
1) 1. An Introduction to Corporate Insolvency
2) 2. Insolvency Legislation
3) 3. When is a Company ‘insolvent’?
4) 4. Corporate Rescue
5) 5. Liquidation
Introduction
1) Why do companies face fin difficulties or become insolvent
2) Under capitalisation (not enough capital to engage in proj, hence hi debt, over
leveraging, thus unable to pay debts)
3) Too rapid growth
4) Not as competitive
Sources of insolvency law
1) ! The Insolvency Act 1986 (replaced IA 1985).
a) Also see Cork Committee Report
2) ! Insolvency Rules 2016 (effective 04/2017)
3) ! Company Directors’ Disqualification Act 1986 [CDDA] note changes by SBEEA 2015]
4) ! Companies Acts 1989 and 2006 (Part VII)-for stability of financial markets
5) ! FSMA 2000
6) ! Insolvency Act 2000 and Enterprise Act 2002-abolition of administrative receivership
7) ! CIGA 2020
Definition of insolvency
,Insolvency and the role of credit
1) What is to be insolvent?
2) Being unable to pay one’s debts
3) S.123
a) The general / specific tests
b) Not able to pay its debts as they fall due
Company is insolvent or on the verge of insolvency… options
1) Liquidation
a) Cessation of trading
b) Sale of assets on a piecemeal basis
2) Trade out of difficulties
a) Restructuring of liabilities
3) Sale of assets or business on better terms than immediate winding up
When is a company insolvent?
1) When it is unable to pay its debt
2) If a company is unable to pay its debts … can it continue to trade, can its creditors take
steps to enforce payment?
3) ! At which point do legal consequences attach (i.e. collective procedure)?
a) ◦ S.240(3) the “onset of insolvency”
b) ◦ It is with the advent of formal insolvency proceedings that company’s inability to
pay debts becomes material
c) ◦ Winding up order or administration gives retroactive legal significance to an
earlier state of insolvency which at the time it arose had no impact in law
Definition of inability to pay debts
1) IA 1986
a) S.123
i) Specific tests
(1) 1(a) -> £750 test
(2) 1(b) -> if decree of court, and creditor is unable to be satisfied
then can be deemed to be unable to pay debts
ii) General tests
(1) s.1(e) -> cash flow test
(2) S.2 -> balance sheet test
,Why is it important to determine whether a company is insolvent or not
1) Prerequisite for the initiation of formal insolvency proceedings.
2) ! If a company is insolvent when it enters into a certain transaction and formal insolvency
proceedings are commenced within a specified time, that transaction may be open to
challenge;
3) ! Whether a company is solvent or not will determine whether a voluntary liquidation is
controlled by its creditors or members;
4) ! Directors also owe certain duties once a company is insolvent;
5) ! Certain company law procedures may only be taken by solvent companies and the
directors may need to make a statutory declaration of solvency.
Process
1) There are two types of process that a company might enter when in financial difficulty: !
a) (1) trying to rescue the company by reaching agreement about debts with
creditors:
i) ◦ Company voluntary arrangement or ◦
ii) Administration ◦ Short-term stand alone moratorium ◦
iii) There are also restructurings available (when solvent or insolvent) such
as schemes of arrangement and the new Part26A Restructuring Plan !
b) (2) dissolution of the company through winding-up
i) ◦ *members’ voluntary winding-up
ii) ◦ * creditors’ voluntary winding-up
iii) ◦ * compulsory winding-up
(1) Winding up in public interest
Types of insolvency procedures
1) Winding up/liqu
a) Voluntary WU
b) Compulsory WU
i) Winding up in public interest
2) Alternatives to liqui
a) Informal arrangements
b) Administration
c) Stand alone moratorium (CIGA introduced)
d) Administrative receivership
e) Statutory compromises, compositions, and arrangements with creditors (CVAs,
Schemes of Arrangement)
, CORPORATE RESCUE
Corporate Rescue
1) Aims:
a) ◦ to protect and balance the interests of competing creditors;
b) ◦ deal with the directors responsible;
c) ◦ promote rescue and recovery.
2) ! Awareness that recoveries for creditors are likely to be higher if the business can be
rescued or restructured rather than closed down and the assets sold.
3) ! Rescue culture that favours responsible risk takers.
4) ! Companies in financial difficulties can be nursed back to health, with protection from
individual creditor action where necessary.
Rescue Mechanisms
1) Administrations
a) Where a company may be rescued or reorganized or its assets realized under
the protection of a statutory moratorium;
b) • Administrator is appointed;
c) • The Enterprise Act introduced an alternative out-of-court route;
d) • Administrator to propose a course of action for rescuing the company together
with steps that will be taken to obtain the approval of the creditors.
e) • Pre-Packs: prepared for sale to a selected buyer
2) CVAs
a) Company and its creditors come to some sort of agreement, which is
implemented and supervised by an insolvency practitioner ;
b) • Directors (or Administrator) may initiate a CVA by making a proposal to the
company and its creditors;
c) • May be used in conjunction with administration where a moratorium gives the
company breathing space to agree any proposals with creditors.
3) Schemes of arrangement
a) A scheme of arrangement must be sanctioned by the court
b) • Where a compromise or other arrangement with creditors (or any class of
creditors) or members (or any class of members) is made under Part 26 of the
Companies Act 2006 which is binding if the appropriate majorities of each class
of creditors/members agree;
4) Short term standalone moratorium
