There are a number of processes available to insolvent companies:
An insolvency practitioner takes control of a company for the purpose of (in the following order):
- rescuing it as a going concern
- achieving a better result for its creditors as a whole than would have been the case had it been wound up without first being in administration, or
- realising its assets and making distributions to certain classes of its creditors.
An Administration can, depending on the circumstances, be initiated by application to the court or by an out-of-court procedure. The company or its directors, the company’s creditors and certain other stakeholders can, subject to various conditions, initiate the process. A company need only show it is, or is about to become, unable to pay its debts.
Because commencement of administration proceedings imposes a moratorium on all claims against a company, it is frequently used as a restructuring tool. ‘Pre-pack’ Administrations, in which a pre-negotiated sale of a company’s business and assets (often to its existing stakeholders) is effected immediately on commencement of the process, are commonly used to salvage value from insolvent companies.
An insolvency practitioner takes control of a company for the purpose of realising its assets and making distributions to creditors, culminating in the company being wound up.
Liquidation can be initiated either:
- out of court by the shareholders of the company passing an appropriate resolution, or
- through the courts following presentation of a winding-up petition by a creditor(s), the company or its directors, or by certain other stakeholders.
The temporary measures introduced in response to the COVID-19 pandemic, where no winding-up petitions could be presented in relation to statutory demands (a form of payment demand conforming to certain requirements) or where a company’s inability to pay its debts arose from the effects of the pandemic, are now at an end.
Most commonly a contractual right (so no court involvement) under which a secured creditor may appoint an insolvency practitioner or other receiver (assuming an enforcement trigger has arisen) to take control of and realise the assets of a company over which it holds security. In contrast to a liquidator or administrator, a receiver’s duties are owed to the appointing creditor and not to the company’s creditors as a whole. This is a much less used remedy as receivers may generally (subject to certain exceptions) not be appointed over the whole or substantially the whole of a company’s assets. Receivership is often reserved for real estate-specific enforcement by a secured creditor, although this limited kind of receivership appointment is not available under the laws of Scotland.
It is possible for a court receiver to be appointed (on the application of certain stakeholders) usually as a means both of preserving property (often against the backdrop of ongoing litigation) and of execution after judgment has been obtained. It is usually resorted to when there is no clear secured creditor willing or able to appoint a contractual receiver or where there is no clear alternative and appropriate insolvency process.
Company Voluntary Arrangement (CVA)
An agreement, governed by the IA 1986, between a company and its creditors and supervised by an insolvency practitioner. The directors of a company (or its liquidator/administrator) issue proposals to creditors seeking to compromise creditor claims in accordance with its terms and bind all unsecured creditors (as well as any secured creditors that consent to be bound) if a 75% approval majority of creditors agree with the terms. Although the proposals are filed with the court it does not undertake any approval process as such, relying on an insolvency practitioner agreeing that the proposals should be put to creditors for a vote.
Scheme of Arrangement
A CA 2006 process, available to solvent and insolvent companies, under which a company reaches a court-sanctioned compromise agreement with its creditors and/or shareholders or any class(es) of them. The process is commenced by an application to the court, which can be made by the company, any of its shareholders or creditors or an administrator or liquidator appointed over it.
IA 1986 Moratorium
Under amendments to the IA 1986 implemented on 26 July 2020 (contained in the Corporate Insolvency and Governance Act 2020 (CIGA)), a new moratorium process (New Moratorium) is now available to eligible companies. The New Moratorium commences when the directors of the company file certain documents with the court, and lasts for 20 days (unless subsequently extended) under the supervision of an insolvency practitioner. This is a free-standing breathing space to allow for restructuring options to be considered.
The CIGA also amended the CA 2006 to introduce a new restructuring plan (Restructuring Plan), similar to a Scheme of Arrangement but including, among other things, an ability to cram down dissenting classes of creditors under certain circumstances. (By contrast, a Scheme of Arrangement will not be sanctioned by the court where a creditor class votes against the proposal.) Like a Scheme of Arrangement, the Restructuring Plan will be overseen by, and require the sanction of, the court, but will only be available to companies facing or likely to face financial difficulties that affect, or may affect, its going concern status.