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Home , Cram down, Floating charge, Insolvency practitioner, Receivership

October 2008

A Short Guide to UK :

BY KEITH WILSON AND ALPER DENIZ

Are you unfamiliar with the Administration “-in-possession” process like Chapter 11 in process in the ? Do you have the US. Administration is intended to achieve contractual relationships with a that one or more of three objectives: has entered Administration? This short overview serves as a practical guide for those who are • rescuing the company as a ; unfamiliar with the Administration process in the • achieving a better result for the company’s United Kingdom. For example, the UK Lehman as a whole than would be likely if entities that have filed for insolvency protection the company were wound up (without first in the United Kingdom (there are four such being in administration); or entities: LB UK RE Holdings Ltd., Lehman Brothers International (Europe), Lehman • realising of the company in order Brothers Holdings PLC and Lehman Brothers Ltd) to make a distribution to one or more have all entered Administration rather than any secured or preferential creditors. of the other UK insolvency regime processes. These objectives are sequential in that the If the company with which you are dealing applies Administrator can only move to the second for insolvency protection in the UK, you need to objective if the Administrator considers it not check which process applies – Administration is reasonably practicable to pursue the first highly likely, in which case this overview is objective and so on. The intention is to create a relevant. There are other processes: , rescue culture. administrative , receivership and it is also possible the company might propose a Administration is often used as a “tool” to effect Company Voluntary Arrangement or Scheme of a sale of a or significant Arrangement from within or outside a formal conducted by the company. Frequently, this is insolvency process. Please note that this overview achieved by way of a “pre-packaged does not address these alternative processes. Administration” – which simply means that the However, if you require further advice on these, person who will be appointed Administrator will please contact Keith Wilson. have been consulted prior to his or her appointment with a proposal as to how the What is Administration? Administration would be conducted. If the In broad terms an Administrator – a qualified proposed Administrator is satisfied that the – replaces the board of proposal meets the objectives of an directors as the manager of the company in Administration, he or she may indicate that they administration. In the UK there is no equivalent will adopt the proposal once appointed. The

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advantage of this approach can be to facilitate a a trading company this will be the trading sale of assets or a business quickly. company’s primary bankers. A is a form of security under which all assets and Can Any Company Simply Apply for undertaking of the company from time to time Administration? are secured to a particular . The peculiarity is that the assets and undertaking of Generally a company must be technically the company can change in the ordinary course insolvent before it can enter Administration. The of the company’s business and yet the security test is whether the company is “unable to pay its captures the new assets and undertaking. ”; this phrase has a specific statutory Certain events will crystallise the floating charge definition. Among a number of tests is a balance into becoming a fixed charge. sheet test – does the company’s liabilities, including contingent liabilities, exceed its assets? The advantage of being a Qualifying Floating – and a cash flow test – is the company able to Charge-holder goes beyond the ability to appoint pay its debts as they fall due? The exception is an Administrator out of court. Such a charge- that a Qualifying Floating Charge-holder – see holder may also block the appointment of an below – may apply to the court to appoint an Administrator by any other party by appointing Administrator if the charge permits such its own Administrator. appointment, even if the company is not likely to be “unable to pay its debts” at the relevant time. Effects of Administration: The Moratorium

How to Enter Administration Administration brings with it a statutory moratorium on certain actions of creditors The administration process has a degree of against the company. flexibility in that it is possible to enter administration by way of either a court process Exception: Where the Financial Collateral Regulations or through an out of court route. The company, apply, the holder of financial collateral is not bound by its directors or a Qualifying Floating Charge- the moratorium and remains entitled to enforce its security. This may be applicable to derivative contracts holder may use the out of court route and the and other financial instruments. For further information company, directors or creditors may use the on this, please contact Alper Deniz. court process. With this exception, the moratorium prevents Although an Administrator may be appointed the following: using the out of court route, the Administrator will be an officer of the court. Details of the • no resolution or order can be passed to appointment will be required to be filed with the wind up the company, (in other words, no court and generally there can be recourse to the liquidation); court in relation to the conduct of the administration. • no steps can be taken to enforce security over the company’s property except with Qualifying Floating Charge-holder the consent of the Administrator or permission of the court; We said that a “Qualifying Floating Charge– holder” can go the out of court route to appoint • no steps can be taken to repossess goods an Administrator. So, what is a “Qualifying in the company’s possession under a hire Floating Charge-holder”? It is a creditor who purchase agreement, retention of title holds a in all or substantially all arrangement, or bailment without of the company’s assets including, as part of the the consent of the Administrator or security package, a floating charge. Generally in permission of the court;

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• a real estate landlord may not exercise a • power to dispose of property subject to a right of forfeiture by peaceable re-entry in floating charge as if it were not subject to relation to premises let to the company that charge. The holder of the floating except with the consent of the charge will have the same priority in Administrator or permission of the court; respect of the proceeds of sale as it had and over the disposed of property;

• no legal process, including commencing • power to dispose of property that is legal proceedings and executing or subject to a security other than a floating enforcing judgments, may be instituted or charge or which is in the company’s continued against the company or possession as a result of a hire purchase property of the company except with the arrangement, retention of title consent of the Administrator or permission arrangement, lease of other bailment as if of the court. the company were the owner. Such a disposal requires a court order and the net What the Moratorium Does Not Prevent proceeds or the market value (if greater) You from Doing of the property disposed of must be paid to the security holder or owner. A counterparty to a contract with a company remains entitled to terminate the contract if the Note: Neither of these powers apply to collateral contract contains a right of termination subject to the Financial Collateral Regulations. exercisable at that time. This is a material difference to Chapter 11 in the US. Conduct of Administration How Will I Know if a Company is in Within 8 weeks of appointment, the Administration? Administrator must make a proposal to all The Administrator must, as soon as reasonably creditors and members of the company and send practicable after appointment, obtain details of this to each of them. Proposals will also include the company’s creditors and notify the company an invitation to an initial creditors meeting which and all of the creditors of the appointment. The must take place no more than 10 weeks after notice must be in writing and must be sent by the company went into Administration. Note, post. It must also be advertised in the London however, that a meeting is not required if the Gazette and a relevant newspaper. Details of the company has sufficient property to pay all appointment must also be filed at creditors in full or if there will be insufficient House within 7 days of appointment. This will assets to enable a distribution to be made to then show up on a company search. unsecured creditors.

Certain Powers of an Administrator At the initial creditors’ meeting the Administrator will present his proposals and the creditors vote. If the Administrator reaches the conclusion that The voting is by way of value of claims and a it is not possible to sell the company as a going simple majority will approve the proposal. concern, it is possible to sell all or part of the Generally secured creditors only vote any company’s business to a subsidiary leaving unsecured portion of their because they behind certain of the liabilities. The subsidiary cannot be crammed down. There are also rules as may then be sold. to how claims of lessors are to be valued. If the proposal is rejected, the Administrator must report In support of the Administrator’s ability to sell to court and seek directions. the company or all or part of its business, the Administrator has certain powers:

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An Administrator will send regular progress down (including secured debt in the latter case)) reports to the creditors, the court and the or liquidation of the company. Each of these may Registrar of Companies. occur after implementation of sales of assets or of the company’s undertaking as part of the An Administrator’s appointment automatically proposal. ends after 12 months unless it has been extended by the court or with the approval of Position of Employees the creditors. Administration itself does not terminate or amend the employment contracts of employees. of Debt In the Paramount Airways case, the court held There is no automatic cram down of debt. that an Administrator will be taken to be However, the Administrator’s proposals may, in continuing employment contracts if the effect, lead to this for unsecured creditors – Administrator continues to employ and pay staff while secured creditors can only be made to on the same terms after 14 days from the date accept a reduction in the amounts they are owed of appointment as Administrator. In such with their agreement or through a Scheme of circumstances, employees’ wages, salary Arrangement (a formal court sanctioned process (including holiday pay), and contributions to that can lead to a cram down in certain occupational pension schemes will become a circumstances with a less than unanimous vote priority claim ranking above even the of the class of creditors of which the secured Administrator’s own fees and expenses. If the creditors form part). The usual exits from Administrator chooses to terminate contracts of Administration for a company with insufficient employment, then the employee will be entitled assets to meet its liabilities will be a Company to statutory compensation and any contractual Voluntary Arrangement, a Scheme of compensation due but these will each rank only Arrangement (either of which can include a cram as unsecured claims.

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If you have further questions concerning these developing issues, please do not hesitate to contact any of the following Paul Hastings London lawyers:

Keith Wilson Alper Deniz 44-20-3023-5141 44-20-3023-5173 [email protected] [email protected]

18 Offices Worldwide Paul, Hastings, Janofsky & Walker LLP www.paulhastings.com

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