An Introduction to UK Insolvency · 2019-10-10 · 4. HCC I Credit & Surety Division. October 2008....

HCC I

Credit & Surety Division October 2008

FILE 2008105

An Introduction to UK Insolvency

Jim DavidsonOctober 2008

ICISA Autumn MeetingsCredit Insurance Committee

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United Kingdom

N.I.

SCO

TLA

ND

Leicester

Cardiff

Edinburgh

ENG

LAN

D

WA

LES

Belfast

EIREDublin

London

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Insolvency

• What is insolvency?– Unable to pay one’s debts (Dictionary)– Inability to pay debts when they fall due– Rules set out in Insolvency Act 1986 as amended by Enterprise Act

2002

• Why do companies fail?– Run out of money, some examples :

• Cash flow management• Poor management• Inadequate capital / financial control• Fraud• High overheads• Change in market demand• Continuing losses

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Statute / Regulation

• Statute– Insolvency Act 1986– Enterprise Act 2002– Law of Property Act 1925

• Insolvency Practitioners– Must be an individual– Licensing by professional bodies or relevant authorities set up by the Secretary

of State• Only OR and LPA Receiver are not IP’s

• Trade Association– R3 – promotes best practice for insolvency professionals

• Useful web addresses– www.R3.org.uk– www.insolvency.gov.uk– www.insol.org– www.insolvency-practitioners.org.uk

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Enterprise Act 2002

• Changes post E-day (15th September 2003)– Emphasis on rescue of company and creditors interests– Prescribed part (funds set aside for unsecured creditors)– Streamlined appointment procedures– Abolition of crown preference– Tighter timescales– Result = many more Administrations and hardly any

Administrative Receiverships

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Types of English Insolvency

Individual Voluntary Arrangements

Partnership Insolvency

Creditors’ Voluntary Liquidation

Members’ VoluntaryLiquidation

Compulsory Liquidation Company VoluntaryArrangement

AdministrativeReceivership

AdministrationBankruptcy

CompanyPersonal

Insolvency

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Personal Insolvency

• Applies to individuals and also to non-limited companies– Bankruptcy

• Individual applies to court for a bankruptcy order; or• A creditor owed more than £750 commences bankruptcy proceedings• Supervisor of an IVA applies to court for a bankruptcy order

– Individual declared bankrupt.– Supervisor realises assets and creditors receive a share

– Individual Voluntary Arrangement• Proposal to creditors to pay a proportion of debt over an agreed period• Must be agreed by majority of creditors• Supervised by an Insolvency Practitioner

– Creditors receive part payment on a pari passu basis

– Partnership Insolvency• Partners apply to court for a winding up order; or• Creditor applies to court for a winding up order

– Liquidator appointed to realise assets– Creditors receive part payment on pari passu basis as in liquidation

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Company Liquidations

• Members Voluntary Liquidation– Covered by Insolvency Act but not actually insolvent

• Members resolve to appoint liquidator (Insolvency Practitioner)• Members make a statutory declaration of solvency• Orderly winding up of company over a 12 month period• All creditors are paid in full unless……

• Creditors Voluntary Liquidation– Members pass an extraordinary resolution to commence winding up and appoint

liquidator– Up to 14 days later meeting of creditors held

• Liquidator appointed (Insolvency Practitioner)• Company put into liquidation• Statement of affairs presented• Creditors receive a dividend on pari passu basis, often years later

• Compulsory Liquidation– Creditors apply to the court for a winding up order -company cannot pay debts– Court make a winding up order and appoint liquidator (Official Receiver)

• Often results in appointment of the court liquidator – the Official Receiver

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LPA Receiver

• Law of Property Act 1925 section 101– Mortgagee / charge holder entitled to appoint an LPA

Receiver• Specific to certain land /property• Entitled to receive rent• Power of sale upon application to court

– If there is an express power in the mortgage deed – Where mortgage money is due

– Company itself is not necessarily insolvent• Company still liable to pay creditors

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Company Voluntary Arrangements

• Company in financial difficulties– Proposal to creditors to pay a proportion of debt over an

agreed period

– Must be agreed by majority of creditors (75%)

– Supervised by an Insolvency Practitioner

– Creditors receive part payment on a pari passu basis

– Company can continue to trade

– Better outcome for creditors than liquidation…unless

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Administrative Receivership

• Debenture holder appoints an administrative receiver– AR is receiver or

manager for the whole of the property of the company

– Appointment by fixed charge holder is a receiver

• Admin Receivers Powers– Same as those of the

administrator• Take possession of property• Sell property• Raise money on security• Carry on business• Appoint agents• Execute deeds /documents• Use company’s seal

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Administrative Receivership

• Clearly defined procedure– Administrative Receiver appointed by debenture holder

– Notice of appointment published in London Gazette and press

– Notice to creditors within 28 days of appointment

– AR requests statement of affairs -directors have 21 days to provide

– Report to registrar, trustees and unsecured creditors within 3 months

– Meeting of creditors called

– Creditors committee formed

– End of process by vacating office, giving notice to company, any liquidator and creditors

• Does not distribute dividends or approve claims of unsecured creditors -a liquidator does this

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Administration

PURPOSE

If rescue fails, achieve a better

result for creditorsthan winding up

Rescue companyas a goingconcern

Realise assets to make aDistribution to

creditors

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Administration

• Appointment– By order of court

• Company, directors, creditors or court can apply for order

– Holder of a floating charge– Company directors

• Administrators Powers– Take possession of

property– Sell property– Raise money on security– Carry on business– Appoint agents– Execute deeds /documents– Use company’s seal

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Administration

Administration Order applied for

Administrator appointed

Registrar of companies informed, creditors notified, SOA produced

Proposals issued within 8 weeks of order

Meeting of creditors may be held

Appointment of creditors committee

Complete administration

Apply to court for discharge

ADMINS

T

R

ATION

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Administration

• Key features:– Can be applied for on the grounds that company cannot pay

or is unlikely to be able to pay its debts – Last for one year -can be extended if creditors agree– Duty to all creditors– Creditors can challenge appointment by directors– Administrator must be a Licensed Insolvency Practitioner– Sale of business as a whole is primary objective

• Pre-Packs

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Administration - Pre-Packs

• Pre-Pack – Pre-packaged sale of an insolvent company’s business– Sale arranged and then signed simultaneously with the

appointment of the Administrator– Perceived lack of transparency– Creditors not involved in the process– Debts left unpaid while the “business” continues to trade,

often as a “Phoenix”• ABI currently co-ordinating UK credit insurers• Lobbying government / professional bodies for greater

transparency and involvement of larger creditors

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Statistics - Liquidations

Number of Company Liquidations in England and Wales (Seasonal Adjustment)

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008p

Thou

sand

s

Total Liquidations Compulsory Liquidations Creditors Voluntary Liquidations

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Statistics - Individuals

Number of Individual Insolvencies in England and Wales (Seasonal Adjustment)

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008p

Thou

sand

s

Total Individuals Bankruptcies IVA

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Statistics – Admin / Admin Rec

0

1,000

2,000

3,000

4,000

5,000

6,000

2002 2003 2004 2005 2006 2007 2008

Receivership Appointments Administrator AppointmentsIn Administration (Enterprise Act 2002) Company Voluntary ArrangementsTotal

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Insolvency Frequency

Insolvency Rate (Insolvencies as a percentage of active companies)

0.4

0.9

1.4

1.9

2.4

2.9

%

Nr of Insolvencies 14,898 14,405 11,591 9,672 10,634 15,320 29,985 33,203 26,316 21,028 18,297 16,831 15,272 19,141 16,813 16,907 18,181 19,141 16,915 15,255 16,348 17,819 15,631 18,527

Nr of Companies (in millions) 0.8 0.8 0.9 0.9 1.0 1.0 1.0 0.9 0.9 0.9 1.0 1.0 1.1 1.2 1.3 1.3 1.4 1.5 1.7 1.8 2.0 2.1 2.3 2.5

Insolvency Rate 1.78 1.81 1.37 1.06 1.11 1.55 2.27 2.63 2.28 1.85 1.55 1.35 1.19 1.15 1.16 1.09 1.09 1.13 0.88 0.69 0.68 0.64 0.56 0.56

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

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Insolvency

• Rate of Insolvency - PWC figures– Corporate insolvencies in quarter two of 2008 actually fell by 3.1%

from the first quarter of the year, but were up by 22% on the same quarter of last year.

– 3,277 businesses across England and Wales entered into insolvency in April, May and June of this year.

– This number is down on the previous quarter, when taking into account seasonal trends but is still at a five-year high.

– The numbers of insolvencies continue to rise on an annual basis at around 10%.

– Numbers will continue to rise at least at this rate throughout the year.• firstly because there are an increasing number of companies in work-out • secondly, because many management teams have not been through a

downturn before

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Scotland

• Differences between England and Scotland– Personal - Bankruptcy Scotland Act (1985)

• Sequestration – Scottish version of bankruptcy• Protected Trust Deed – similar to English IVA

– Company – Insolvency Act 1986• No Official Receiver• Compulsory Liquidation

– 1st stage is appointment of provisional liquidator before full liquidation

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Northern Ireland

• Similar to English insolvency law– The Insolvency (Northern Ireland) Order 2005– The Insolvency (Amendment) Rules (Northern

Ireland) 2006• Bankruptcy• Liquidation• Voluntary arrangements• Administration (incorporating Enterprise Act changes)• Limited use of Administrative Receivership

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Country comparisons

Nature of Insolvency UK Add countriesIndividual –formal insolvency through court BankruptcyIndividual –arrangement with creditors Individual Voluntary

ArrangementCompany – solvent, winding up Members Voluntary

LiquidationCompany – members appoint liquidator, ratified by creditors

Creditors Voluntary Liquidation

Company -forced insolvency by court following winding up

Compulsory Liquidation

Company – appointment by charge holder pre Enterprise Act

Administrative receivership

Company – appointment by directors, creditors, charge holder, court - post Enterprise Act

Administration

Company – mortgagee exercising rights LPA ReceiverCompany – arrangement with creditors, continue trading

Company Voluntary Arrangement

DEVELOP ICISA TABLE?

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Questions

An Introduction to UK Insolvency · 2019-10-10 · 4. HCC I Credit & Surety Division. October 2008....

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