Insolvency in the UK is currently regulated by the Insolvency Act 1986. However, it is relevant to point out that a modernisation of the Insolvency Act 1986 will see the light this year by means of the Insolvency (England and Wales) Rules 2016 due to come in force in April 2017.[1] The purpose of the new legislation is to be up-to-date with developments in the business world.[2] Important changes include the embracement of electronic communication in everyday life. Therefore, it will be possible to validly communicate with creditors by electronic means and hold meetings amongst creditors by videoconferencing.[3] Creditors who do not wish to be involved in the correspondence have the option to decline participation and small amounts of money may be paid directly without requiring a formal authorisation.[4]
The insolvency procedures available in the UK are five: i) administration, ii) company voluntary arrangement (CVA), iii) administrative receivership, iv) compulsory liquidation, and v) creditors’ voluntary liquidation (CVL).[5]
The administration procedure allows a company to remain in place whilst considering the future prospects of the business.[6] If is possible to rescue the company – either a financial restructuring may be proposed or the sale of the business together with all its assets.[7] This procedure is also being used to liquidate the assets and distribute the proceeds amongst the creditors, though it should be said this is not the intended purpose of the administration procedure.[8] A company can make an application for administration in court by means of an administrator who must be an insolvency practitioner. There is also the possibility for the company directors to appoint their own administrator and register the necessary papers in court. [9]
In a company voluntary arrangement, an insolvent company can forward proposals to its creditors for settling its debts – either in whole or in part. It allows a company to devise its own layout and thus not be constrained by the Insolvency Act. [10] The arrangement must be approved by not less than 75% of the creditors at which point it is binding on all with the exception of the secured or preferential creditors.[11]
Administrative receivership is only available to secured creditors on an individual basis.[12] There are two types of receivers: an ‘administrative receiver’; and a ‘Law of Property Act (LPA) receiver’ or ‘fixed charge receiver’. An administrative receiver is in charge of the whole or the majority of the assets and the running of the business. An LPA receiver, who does not need to be a licensed insolvency practitioner, is mainly used to sell a particular asset such as land. [13] It should be noted that an LPA receiver’s competence terminates should an administrator be appointed. On the other hand, an administrative receiver precludes the appointment of an administrator.[14]
Compulsory liquidation is often initiated by the creditors. They need to petition in court for the winding-up of the company. In the petition the creditors, or whoever is making the petition, must show that the company is not able to meet its debts.[15] Article 123 of the Insolvency Act provides certain criteria for determining the inability to pay debts. Amongst these is the inability to pay a debt of at least £750 within 21 days; cash flow problems; and proof that the company’s liabilities surpass the value of its assets.[16]
In a creditors’ voluntary liquidation 75% or more of the shareholders pass a resolution for the winding-up of the company and the appointment of a licensed insolvency practitioner as liquidator. The liquidator appointed by the shareholders needs to be approved by the creditors and if not they can choose to appoint a different liquidator. The creditors act by majority voting based on the value of credit owed.[17]
Insolvency in Germany
In Germany the Insolvency Code (Insolvenzordnung) governs insolvency proceedings in the country. Enacted in 1999, the Insolvency Code replaced the 1877 Bankruptcy Code (Konkursordnung) and stressed the importance of reorganisation in preference to liquidation.[18] The Code has been amended over the years, with some reforms having taken place recently.[19]
On the 1 March 2012 an important amendment was passed revising the German Insolvency Code. It is headed the Act for the Further Facilitation of Restructuring of Companies, also known as the ESUG (Gesetz zur weiteren Erleichterung der Sanierung von Unternehmen).[20] With the purpose of encouraging the filing of insolvency to be made as early as possible, the stipulations for the debtor entity’s self-administration were made less stringent.[21]
By virtue of the ESUG, creditors can take a more active part and at an earlier point in the insolvency proceedings. The creditors are provided with more in-depth information regarding the initial phases of self-administration and the appointment of an administrator and the focus of the proceedings has shifted away from being mostly dominated by the court and the administrator.[22] The added protection offered to creditors has the collateral effect of benefitting the shareholders who stand to gain from the successful outcome of the restructuring plan. Different restructuring alternatives are possible under the ESUG amendments since any approach that is within the limits of corporate law may be put forward.[23]
In the past, the notion of self-administration was frowned upon because it sounded awkward to rely on a person who is filing for insolvency to, on the other hand, manage the restructuring plan. Thus, the debtor entity was refrained from being able to commence the self-administration process until a formal go-ahead was declared by the court. All-in-all, self-administration programs were the exception rather than the norm.[24]
This has changed following the enactment of the ESUG, and the initiation of a self-administration program can begin upon the instigation of the debtor entity, operating under the supervision of a trustee. This is subject to the unanimous vote of the creditors’ committee but once accepted the court is not obliged to scrutinize the agreement.[25] Self-administration encourages the management to declare a state of insolvency when this becomes imminent by making the transition less dramatic. This also reflects in the costs of self-administration being lower than in normal insolvency proceedings.[26]
The ‘protective shield’ is another useful mechanism introduced by the ESUG that allows the insolvent company up to three months for the preparation of an insolvency plan and refrain creditors from making any claims whilst the protective shield is still running.[27] The court will decline to grant the protective shield only if the chances of successfully restructuring the company are too remote. This awards the debtor entity time to prepare and submit an insolvency plan. By means of the ESUG, the protective shield is integrated in the preliminary proceedings not treated as an external process of the restructuring plan.[28]
The ESUG made the setting up of a creditors’ committee compulsory under certain conditions. Three conditions are stated by the amendment and it is enough to satisfy any two of these three. They are: i) a balance sheet total of at least €4,840,000, ii) revenues of at least €9,680,000, and iii) an average of at least 50 employees.[29]
During an insolvency plan, the ESUG had introduced the possibility to alter the rights of shareholders even if they do not approve of such changes. In what is referred to as the constructive part, the claims of a creditor may be converted into shares.[30]
For an insolvency proceeding to be initiated a request needs to be filed in court.[31] Insolvency rules apply to both physical and legal persons and partnerships. The competent court is the place of residence or the place of business of the debtor.[32] Since the replacement of the 1877 Bankruptcy Code there is an emphasis towards reorganization rather than outright liquidation.[33] The measures intended to promote reorganization are, inter alia, the insolvency plan and the influence of the insolvency administrator to avoid liquidation.[34] The administrator’s main goal is to retain the assets of the business venture to increase the possibility of recovery.
As part of the insolvency initiation proceedings a reason must be specified indicating why the entity is insolvent. The main reasons for declaring insolvency are: i) illiquidity, and ii) over indebtedness. ‘Illiquidity’ means the entity does not have enough liquid assets to meet its financial obligations. ‘Over indebtedness’ is an entity’s inability to meet its obligations based on all its assets – this insolvency reason only applies to legal entities.[35]
Another reason that was added for the application of insolvency proceedings is that of imminent illiquidity. Under this insolvency reason, the application is processed more speedily while more assets are still available and increase the possibility of an entity’s successful reorganization.[36]
At this stage, for the insolvency proceedings to continue further, the entity must have enough assets to cover the costs which the proceedings entail. These costs are namely: the court fees, the remuneration of the administrator and the creditors’ committee. In the event that the costs of proceedings are not covered by the available assets the insolvency application is dismissed and the consequences are dissolution for a legal entity or, in the case of a natural person, five years blacklisted as an insolvent debtor.[37]
If an insolvency application is accepted the court will appoint an administrator to liaise with the creditors on the future options available. At that point, all rights of management and transfer of assets of the entity are handled exclusively by the administrator.[38]
At the heart of the insolvency proceedings is a plan that meets the best interests of the creditors. The insolvent entity is shielded from individual actions by the creditors who have to act in tandem through the committee.[39] All the parties involved have to agree on a final plan which is presented to the court for acceptance. If approved by the court, the entity concerned regains control of the assets and has to provide for the proper implementation of the plan, if necessary under the surveillance of the administrator.[40]
Author: James Camilleri
Get in touch: info@pkfmalta.com | +356 21 493 041
[1] ‘Modernised insolvency rules commence in April 2017’ (Gov.UK, 25 October 2016) <https://www.gov.uk/government/news/modernised-insolvency-rules-commence-in-april-2017> accessed 22 March 2017.
[2] Ibid.
[3] Ibid.
[4] Ibid.
[5] ‘Insolvency in brief’ (PricewaterhouseCoopers, 2009) <https://www.pwc.co.uk/assets/pdf/insolvency-in-brief.pdf> accessed 22 March 2017.
[6] Ibid.
[7] Ibid.
[8] Ibid.
[9] Ibid.
[10] ‘Brief guide to English Corporate Insolvency Law’ (Linklaters.com, 2008) <http://www.linklaters.com/pdfs/Insights/banking/Guidetoinsolvency.pdf> accessed 22 March 2017.
[11] (n 2).
[12] (n 7).
[13] Ibid.
[14] Ibid.
[15] Ibid.
[16] Ibid.
[17] (n 2).
[18] ‘German Insolvency Law’ (Schultze & Braun) <https://www.schubra.de/downloads/broschueren/0027_en.pdf> accessed 24 March 2017.
[19] ‘German Insolvency Law – an overview’ (Mayer Brown, 2016) <https://www.mayerbrown.com/files/Publication/f1c7d753-bf54-4235-9298-70d0081a6438/Presentation/PublicationAttachment/3010b5c6-cc6a-4b1a-9fda-b112d03d6485/German_Insovency_Oct_14_A4.pdf> accessed 24 March 2017.
[20] ‘First Experiences with the revised German Insolvency Code (ESUG)’ (GLNS, 2017) <http://www.glns.de/en/news/newsletter/2013/1/insolvency-code/> accessed 11 April 2017.
[21] Ibid.
[22] Ibid.
[23] Ibid.
[24] Ibid.
[25] Ibid.
[26] Ibid.
[27] Ibid.
[28] Ibid.
[29] Ibid.
[30] Ibid.
[31] ‘Introduction to German Insolvency Law’ <https://www.justiz.nrw.de/WebPortal_en/projects/ieei/documents/public_papers/german_insolvency.pdf> accessed 24 March 2017.
[32] Ibid.
[33] (n 15).
[34] Ibid.
[35] (n 17).
[36] Ibid.
[37] Ibid.
[38] Ibid.
[39] Ibid.
[40] Ibid.