Corporate rescue

Question 1

What is the purpose of administration?

Answer 1

Schedule B1, para 3(1) of the IA 1986 provides that the administrator of a company must perform their functions with the objective of:

• rescuing the company as a going concern; or
• achieving 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
• realising property in order to make a distribution to one or more secured or preferential creditors.

These three objectives are collectively referred to as ‘the purpose of administration’.

Question 2

What are the three methods of appointing an administrator?

Answer 2

An administrator can be appointed in three ways:

• by the company or its directors
• by a qualifying floating chargeholder
• by court order.

Question 3

Briefly outline the effects of administration.

Answer 3

The effects of administration are:

• depending on the method of appointment, any pending winding up petition will be dismissed or suspended;
• any administrative receivers will vacate office;
• there is a moratorium of insolvency proceedings and certain other legal processes;
• the powers of the directors are effectively suspended; and
• the business documents and websites of the company must state that it is in administration.

Question 4

What is a pre-pack?

Answer 4

Paragraph 1 of Statement of Insolvency Practice 16 defines a pre-pack as ‘an arrangement under which the sale of all or
part of a company’s business or assets is negotiated with a purchaser prior to the appointment of an administrator and the administrator effects the sale immediately on, or shortly after, appointment’.

Question 5

When will a company cease to be in administration?

Answer 5

A company ceases to be in administration when the administrator’s appointment ceases (Schedule B1, para 1(2)(c)), which can occur in a number of ways.

Question 6

What is a CVA?

Answer 6

A company voluntary arrangement (CVA) is an insolvency procedure that allows a company to enter into a binding
arrangement with its creditors.

Question 7

Who can propose, and act as nominee for, a CVA?

Answer 7

The process of implementing a CVA begins with a proposed arrangement between the company and its creditors. A
proposed CVA comes from:

• the company’s directors, providing that the company is not in administration or liquidation (s. 1(1));
• the company’s administrator, if the company is in administration (s. 1(3)(a)); or
• the company’s liquidator, if the company is in liquidation (s. 1(3)(b)).

Question 8

How is a CVA approved?

Answer 8

The proposed CVA will need to be approved by the company and its creditors.

• As regards obtaining the company’s approval, the nominee must invite the company’s members to a meeting to consider the proposed CVA (IR 2016, r 2.25(1)). The members, who must be provided with at least 14 days’ notice of the meeting, will approve the proposal if a majority of them (in value) vote in favour of the proposal (IR 2016, r 2.36(1)).
• The creditors will approve the proposal by way of a qualifying decision procedure (IA 1986, s. 3(3)), and the details of this procedure (e.g. venue, how the decision is to be decided) will be determined by the nominee
  (IA 1986, s. 246ZE(2)). Alternatively, the ‘deemed consent procedure’ can be used, under which the proposal will be approved unless 10% of the creditors in value object to the proposal (IA 1986, s. 246ZF).

Question 9

What is a moratorium

Answer 9

The moratorium is a freestanding procedure that aims to provide ‘a company in financial distress a breathing space in which to explore its rescue and restructuring free from creditor action’ (Explanatory Notes to the CIGA 2020). Accordingly,
during the moratorium, certain conduct is prohibited (e.g. certain insolvency and legal proceedings may not be brought against the company).

Question 9

What is the process for obtaining a moratorium?

Answer 9

The process for obtaining a moratorium depends upon where the company was registered and whether it is subject to a winding up petition, as follows:

• A UK-registered company that is not subject to a winding up petition can obtain a moratorium if the director file the ‘relevant documents’ with the court (IA 1986, s. A3).
• An overseas company that is not subject to a winding up petition can obtain a moratorium if the directors apply to the court for a moratorium, and the application is accompanied by the relevant documents set out above (s. A5).
• A company (UK-registered or overseas) that is subject to a winding up petition can obtain a moratorium if the
  directors apply to the court for a moratorium, and the application is accompanied by the relevant documents set out above (s. A4).

Question 10

How can a moratorium be terminated?

Answer 10

A moratorium will terminate following the expiration of the initial 20-day period or, if extended, the expiration of the extension period. A moratorium can be terminated prior to these periods in several circumstances:

• A moratorium will be terminated if the company enters into a Pt 26 scheme of arrangement or a Pt 26A restructuring plan, or if the company enters into a relevant insolvency procedure (e.g. administration, CVA, liquidation) (s. A16);
• The monitor can terminate the moratorium in certain circumstances (e.g. he thinks that the moratorium is no longer likely to result in the rescue of the company as a going concern) (s. A 38).
• The court can terminate a moratorium if it is successfully challenged. For example, a creditor, director, member, or
  any person affected by the moratorium can challenge the moratorium on the ground that an act or omission of the
  monitor unfairly harmed their interests (ss. A 42).