Corporate Rescue and Insolvency

Corporate Rescue and Insolvency

Fostering a ‘rescue’ culture

The failure of a company can have an adverse effect on a substantial number of persons.

The Insolvency Act 1986 has a number of mechanisms that aim to rescue struggling companies to bring them back to profitability, or to achieve a more advantageous winding-up.

The most useful mechanism is probably administration.

Administration

This is the most ‘pro-rescue’ mechanism.

An administrator is appointed to achieve a hierarchy of objectives, as set out in Schedule B1 paragraph 3 of the IA 1986:

1.       Rescue the company as a going concern.

2.       Achieve a better result for the company’s creditors as a whole than would be likely if the company were wound up.

3.       Realize property in order to make a distribution to one or more secured or preferential creditors.

There are a number of advantages of administration:

-          Administration is normally cheaper than liquidation.

-          Administration may allow the business of the company to be sold as a going concern, rather than as a ‘fire sale’ on liquidation, under which the assets of a company are sold for whatever price the liquidator can obtain.

-          The creditors and directors may have better prospects of being paid than they would if the company was liquidated.

Upon entering administration, an administrator will be appointed who will from then on manage the company’s affairs. The directors can no longer exercise any managerial power without the administrator’s consent.  

Schedule 1 of the Insolvency Act 1986 provides the administrator with a number of powers to achieve the hierarchy of objectives.

The most important and beneficial aspect of administration is the statutory moratorium, which provides that, during the administration, no creditor can enforce their security over the company’s property, or institute legal proceedings against the company or property of the company. This is unless permission has been obtained from the administrator or the court (IA 1986, Schedule B1, para 43).

Company voluntary arrangements

An underused rescue procedure.

This allows the company to enter into a binding arrangement with its creditors.

A CVA involves a number of stages:

1.       A proposal for arrangement. This will form the basis of the CVA. If the company is in administration, the administrator makes the proposal. If it is in liquidation, the liquidator will make the proposal. In all other cases, the directors will make the proposal. Creditors and members cannot make the proposal.

2.       The arrangement must be supervised. If the proposal was made by the liquidator or administrator, they will supervise it. If the directors made the proposal, a nominee will be needed to supervise the arrangement.

3.       The nominee must submit a report stating whether the CVA has a reasonable prospect of being approved, and whether meetings of the company and its creditors can be convened to consider the proposal.

4.       If the meeting can be convened, it should be called in order to approve the proposal. In the event of…