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Corporate bankruptcy under the UK law Vinod Kothari 1012 Krishna 224 AJC Bose Road Calcutta 700 017 Phone 033-23233863/23233864/2281 1276/22817715/22813742.

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Presentation on theme: "Corporate bankruptcy under the UK law Vinod Kothari 1012 Krishna 224 AJC Bose Road Calcutta 700 017 Phone 033-23233863/23233864/2281 1276/22817715/22813742."— Presentation transcript:

1 Corporate bankruptcy under the UK law Vinod Kothari 1012 Krishna 224 AJC Bose Road Calcutta 700 017 Phone 033-23233863/23233864/2281 1276/22817715/22813742 Fax 91-33-23233863/22811276 Email:;

2 Corporate insolvency by Vinod Kothari 2 Copyright information All rights reserved with Vinod Kothari. The presentation is to be used only for the purpose of the training course/meeting/class for which it is intended and any use of any part of it, other than for distribution at such training course/meeting/class is unauthorized. No rights of any kind have been transferred in soft copy of the presentation, meant only for the purpose of printing. The soft copy should be purged immediately after printing. No copying or distribution of this presentation in any form is allowed except with the express permission of the author.

3 Corporate insolvency by Vinod Kothari 3 Brief legislative history UK corporate bankruptcy laws Provisions contained in Insolvency Act 1986: – Prior to enactment of Insolvency Act, the Bankruptcy Act 1914 did not apply to corporate insolvency – Corporate insolvency provisions were contained in the Companies Act, including CA 1985 – Kenneth Cork Committee (Insolvency Law Review Committee) recommended spin off and enactment of Insolvency Act 1985 – The 1985 Act on the very first day replaced by Insolvency Act 1986 – Substantially amended by Insolvency Act 1994 – Further substantially amended by Enterprise Act 2002

4 Corporate insolvency by Vinod Kothari 4 General scheme of bankruptcy resolution under UK law Companies voluntary arrangement (cva): – Not exactly a bankruptcy proceeding, since it is not necessary for the company to be insolvent – No stay on creditors action Administrative receivership: – Formerly known as receivers and managers, or receiver – Appointed by debentureholders having floating charge over substantially the whole of the companys property – Not applicable to unincorporated bodies Administration: – A watered down version of Chapter 11 of the US law; moratorium allowed by creditors to allow the company to restructure – Based on recommendations of the Cork Committee – Covered by Part I of the Insolvency Act Winding up or liquidation: – A process of realisation of the assets and their distribution to put the company to an end Compromises,composition and arrangement: – Voluntary compromises and arrangements: Sec 425 of the CA 1985, Company voluntary arrangement under Part I of the IA 1986, etc Reorganisations, that is, the workouts carried outside of the law

5 Corporate insolvency by Vinod Kothari 5 Data of various filings under the IA 1986 198719881989199019911992199319941995199619971998 Compulsory Liquidations 411636674020597783689734824465975519508047355216 Creditors Voluntary Liquidations 7323576064369074134591469112464101319017838178757987 Administrative Receiverships 126510941706431875158324536238773226270118371713 Administrator Appointments 131198135211206179112159163210196338 Voluntary Arrangements 2147435813776134264372459629470

6 Corporate insolvency by Vinod Kothari 6 Scheme of sections Part I to VII deal with corporate bankruptcies: – Part I corporate voluntary arrangements [sections 1-7] – Part II Administration [Sections 8-12] – Part III Receivership – Part IV winding up – Part V winding of unregistered companies – Part VI Miscellaneous provisions – Part VII Interpretation applicable first parts Part VIII to IX deal with individual insolvency Part XII to XIX deal with matters common to both bankruptcies

7 Corporate insolvency by Vinod Kothari 7 Major philosophical changes introduced by the Enterprise Act Stigma attached to business failures should go: attempts to promote the rescue culture must be promoted Individual pursuits must give way to collective procedures: administrative receivership should be minimised Administration as an important tool in rescue process Abolition of crown preference Ring fencing a proportion of the property for the benefit of unsecured creditors, away from holders of floating charges

8 Corporate insolvency by Vinod Kothari 8 Corporate voluntary arrangements Similar to compromises under the Companies Act: – Insolvency is not a precondition – Directors to propose CVA to company and creditors – A qualified insolvency practitioner must be appointed as a nominee (trustee or supervisor of the process) – CVA may be proposed also during liquidation or while administration is pending Submission of proposal by the proponents to the nominee with required disclosures and SoA – sec 2 The nominee within 28 days shall submit a report to the court whether a meeting of company and the creditors should be summoned On order of the court, meeting shall be summoned The meeting may not affect the rights of secured creditor on his security, except with his sanction Chairman of the meeting to report the result of the meeting to the court The court may confirm after a cooling off period of 28 days Application may be made challenging the decisionwithin 28 days Court may appoint a supervisor

9 Corporate insolvency by Vinod Kothari 9 Meaning of insolvency Sec 123 defines insolvency with reference to inability to pay Specific tests: – Failure to meet a statutorily demanded sum of above GBP 750 within 3 weeks – Returning of an execution unsatisfied General tests: being subjective, these are to be proved to exist to the satisfaction of the court: – Cashflow test: inability to pay debts as they fall due: Commercial insolvency test – Balance sheet tests: assets are insufficient to discharge liabilities

10 Corporate insolvency by Vinod Kothari 10 Preferential debts for individuals and corporates Money owned to inland revenue for tax deducted at source VAT Car tax Betting and gaming duties Social security and pension scheme contributions Remuneration of employees: – 4 months next before the relevant date – Holiday remuneration Changes made by Enterprise Act: money owned to Revenue, VAT, taxes and duties, and social security contributions ceased to be preferential claims Special provisions for claims of unsecured creditors: – Holders of floating charge to cede a share (as per share prescribed)

11 Corporate insolvency by Vinod Kothari 11 Administration – sec 8-12 Meaning – sec 8 (2 – That during the period of the order having effect, the company shall be managed by an administrator, appointed by court Was devised by Cork Committee in line with Chapter 11 of US Bankruptcy code May be ordered if, in the opinion of the court: – The company is, or is likely to be unable to pay its debts; AND – Passing of admin orders may achieve the purposes – May not be ordered where the company is in liquidation Purposes (the court shall state the purpose): – Survival of the company as a going concern – Approval of CVA under part I – Giving effect to a compromise under the CA – More efficient realisation of the companys assets than under winding up

12 Corporate insolvency by Vinod Kothari 12 Process of administration Making of an application: – By the company or its directors – By Bank of England – By creditor or creditors Notice of the petition shall be given: – To the person who has appointed or may appoint an administrative receiver, to Bank of England Where there is an administrative receiver, the petition for admin will be rejected unless the court is satisfied, either, – That the floating charge will be invalid due to non-registration – May be avoided or challenged under the provisions of the IA Interim Order – court may pass interim order restricting the rights of the directors During pendency of application for admin, the following cannot be done except with the leave of the Court: – Resolution for winding up – Enforcement of security interests or repo of goods on hire purchase – Execution, legal process or distress Publication of the order of administration: sec. 21 Notice to all creditors within 28 days Filing of SoA with the administrator – sec 22

13 Corporate insolvency by Vinod Kothari 13 Process of administration -2 Statement of proposals: – Within 3 months, shall file with RoC, and all creditors statement of his proposals – And a lay a copy in a meeting of creditors – Send the statement to all members of the company Consideration of proposals in a creditors meeting: [sec 24] – Administrator to report the result of the meeting to the court: If the meeting has not rejected the administrators proposals, the court may discharge the administration order If the proposals are approved: – Creditors may appoint a committee of creditors to oversee the implementation Right of a creditor or member: sec 27 – During administration, may apply to court if the administrator is acting against the interest of the company, and at least his own interest Discharge of administration order: – The administrator may apply for discharge, if the purpose is satisfied

14 Corporate insolvency by Vinod Kothari 14 Effect of administration order – sec 11 Petition for winding up of the company shall be dismissed Any administrative receiver of the company shall vacate his office Any receiver of any property of the company shall vacate his office to the extent required by the administrator During period of administration, except with the leave of the court: – No winding up resolution can be passed – No administrative receiver can be appointed – No enforcement of security interests may be done – No execution or other legal proceeding may be launched Every document of the company bearing its name shall state that the company is in administration The administrator takes property of the company in his custody – sec 17 Powers of the administrator [sec 14-15] – He acts as the agent of the company – General powers to run the company – Remove directors – With the approval of the court, may sell property subject to charge; The creditor shall then have the same priority over the resulting asset as he had on the sold asset The proceeds shall be used to pay off the creditor

15 Corporate insolvency by Vinod Kothari 15 Administrative receivership One of the most unique institutions under the UK law Distinct from receiver to enforce a security interest, e.g., in case of a mortgage Administrative receivers have a global security interest: – Normal security interest receivership does not lead to bankruptcy; administrative receivership does Is administrative receivership collective procedure: – Is he answerable only to the debentureholders? Strictly speaking yes, but all embracing security interest gives them wider powers – Therefore, partakes similar character as insolvency proceedings

16 Corporate insolvency by Vinod Kothari 16 Provisions of law regarding administrative receivers – sec 39-49 Where an administrative receiver has been appointed, every document of the company shall state so If admin receiver is appointed by debentureholders holding a floating charge, preferential debts shall be paid out of the assets coming to the hands of the receiver in priority: – This payment shall be recouped out of assets payable to general creditors The admin receiver is deemed to be the agent of the company: – Is personally liable for any contract entered into by him – And to the extent of such liability, entitled to be indemnified out of the assets of the company The admin receiver may vacate his office – If the court orders – sec. 45 – Ceases to be qualified insolvency practitioner – Resigns from his office

17 Corporate insolvency by Vinod Kothari 17 Powers of administrative receiver – schedule 1 Power to receive, sell, raise or borrow money, appoint auditors, etc – 23 powers listed in schedule 1 Protection to outsiders dealing with admin receiver – doctrine of indoor management – sec 42 Power to dispose of the assets subject to a security interest: – Provided the net proceeds are applied to repayment of the debt

18 Corporate insolvency by Vinod Kothari 18 Process in case of an admin receiver Shall, within 28 days, notify all creditors of his appointment – sec 46 May require furnishing of a SoA from the officers of the company Within 3 months of appointment, admin receiver shall send a report [sec 48] – To every secured creditor, and RoC – To every unsecured creditor, or publish it in the prescribed manner – Containing : the events leading up to his appointment Disposal or proposed disposal of assets he proposes to make Amount due to debentureholders appointing him Preferential debt, and the amount available to other creditors

19 Corporate insolvency by Vinod Kothari 19 Limitations on admin receivership by Enterprise Act Sec 72A inserted by Enterprise Act inserted several limitations on the power to appoint admin receivers: – Except in excluded cases, holder of a floating charge not to appoint admin receivers Excluded case: – Agreements forming part of a capital market arrangement – Public private partnership projects – Utility companies – Project finance – Market charge, system charge or collateral security charge in case of financial market transactions – relevant for financial intermediaries, charges in favour of authorities

20 Corporate insolvency by Vinod Kothari 20 Winding up Two forms of winding up: – Creditors voluntary winding up: members resolve to put the company under creditors winding up Special resolution passed in members meeting The winding up is largely under the control of the creditors Winding up commences on passing of resolution – Compulsory winding up Initiated on petition of a creditor or other person with locus standi: – Locus standi requires manifestation of tangible interest: e.g., directors, contributories If the court passes a winding up order, the official receiver becomes the liquidator, unless any other liquidator is appointed – sec 136 Procedural aspects: – Furnishing of an SoA – Similar procedures as in case of administration

21 Corporate insolvency by Vinod Kothari 21 Priorities – sec 175, etc Expenses of winding up Preferential debts: – If the assets are insufficient, they shall be paid out of assets subject to floating charge – Or else paid out of assets available to general creditors Floating charge holders to cede a certain portion in favour of general creditors General creditors Interest on outstanding debt Power to disclaim onerous property – sec 178 Power to avoid transactions at undervalue – sec 238 Power to avoid undue preferences – sec 239 – For sec 238/239, time frame is 2 years for insiders, and 6 months in general Power to avoid extortionate credit transactions – sec 244 – Transactions within 3 years prior to onset of insolvency – Terms of credit were extortionate with regard to the risk involved – Otherwise violates principles of fair dealing Avoidance of floating charges within 2 years prior to bankruptcy

22 Corporate insolvency by Vinod Kothari 22 Position of secured creditors Secured creditors real interest is recognised by law: – Secured creditors cannot exercise self-help repossession: They need leave of the court – But the leave of the court is a mere procedural formality: Ruling in David Lloyd and Co (1877) 6 Ch. D 339 Execution creditors: – Cannot enforce execution after commencement of winding up : sec 183 Hire purchase and chattel lease transactions: – Leave of the court required, but position similar to secured creditors

23 Corporate insolvency by Vinod Kothari 23 Position of floating chargeholders Floating chargeholders u/s 176A have to relinquish a prescribed portion The rules prove the following proportion: – (a) where the company's net property does not exceed £10,000 in value, 50% of that property; (b) subject to paragraph (2), where the company's net property exceeds 10,000 in value the sum of - (i) 50% of the first £10,000 in value; and (ii) 20% of that part of the company's net property which exceeds £10,000 in value. The value of the prescribed part of the company's net property to be made available for the satisfaction of unsecured debts of the company pursuant to section 176A shall not exceed £600,000

24 Corporate insolvency by Vinod Kothari 24 Prosecution of delinquent officers Frauds in anticipation of bankruptcy [sec 206]: – If any 12 months prior to filing of bankruptcy: Any person has concealed an asset of the company or debt Removed any of the companys property Concealed destroyed or mutilated any books or paper Made any false entry in books or papers Pawned, pledged or Disposed of any property – The offender is liable to imprisonment or fine or both Transactions to defraud creditors or misconduct during winding up Falsification of books etc Penalties for offences prior to winding up – Contribution for wrongful trading

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