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James Roome, Tom Bannister and Paul Durban www.practicallaw.com/9-501-6812 Bingham McCutchen (London) LLP

FORMS OF SECURITY „„ . A floating charge secures a group of assets, which fluctuate with time, such as cash in a trading 1. What are the most common forms of security granted over bank account. Assets secured by a floating charge are immovable and movable property? What formalities must the identified generically rather than individually (for example, a security documents, the secured or the comply borrower’s undertaking and assets or inventory). with? What is the effect of non-compliance with these formalities? Unlike a fixed charge, a floating charge allows the borrower to deal with the charged assets in the ordinary course of business Immovable property without the charge holder’s consent. If certain events occur Common forms of security. The most common forms of security (usually events of set out in the charging instrument), over immovable property are: the floating charge effectively becomes a fixed charge in relation to all assets over which it previously “floated”, and which remain „„ Mortgage. A mortgage is a transfer of ownership in land or in the borrower’s possession. At this point, the floating charge other property to secure the payment of a debt or to discharge crystallises and the borrower is then unable to dispose of the some other obligation. The debtor has a right of redemption, assets without the lender’s consent. under which the creditor must transfer title back to the debtor when the debt is repaid or the obligation discharged. In the order of payment on an insolvency, floating charge holders „„ Fixed charge. A fixed charge is typically taken over a specific, rank behind fixed charge holders and certain other see( valuable asset (such as land, machinery, ships or aircraft). Question 2). Title and possession remain with the borrower, but the „„ Pledge. A pledge is a way to create security by delivering an borrower cannot usually dispose of the asset without the asset to a creditor to hold until an obligation is performed (for lender’s permission or until the debt is repaid. This can cause example, a debt is repaid). The creditor takes possession of Country Q&A difficulties where the relevant assets (for example, accounts the asset while the debtor retains ownership. The creditor can receivable) are used in the ordinary course of the borrower’s sell the pledged asset if the obligation is not performed. business and therefore floating charges are used in these cases (see below, Movable property: Floating charge). „„ . A lien is the right to retain possession of another person’s property until a debt is settled. arise A lender holding a fixed charge has recourse to the asset if the automatically under English law in certain types of borrower defaults under the loan. The lender usually has a power commercial relationships, such as a client’s relationship of sale over the asset, or the power to appoint a fixed charge with his solicitors or bankers. They can also be created receiver to deal with and realise the asset on its behalf (because contractually. A lien does not confer a right on the holder to of concerns over lender liability, the second option is normally dispose of the relevant asset if the debt is not paid. used). The lender therefore has a claim over the proceeds of sale in priority to other creditors. Where the sale proceeds are less Formalities. Formalities for creating a depend on than the amount of the loan, the lender has an unsecured claim the nature of the asset over which security is to be granted and for the balance, but if there is a surplus after repayment of the the nature of the security interest to be granted. loan, the balance must be returned to the borrower. To be effective against liquidators, administrators and buyers of A fixed legal mortgage or charge is the best security interest relevant assets for value, most mortgages and fixed charges, and available as it gives the secured lender a proprietary interest in the all floating charges created by a company must be registered with asset ahead of the costs and expenses of office holders appointed Companies House within 21 days of their creation. Registration on an insolvency (other than those of the receiver appointed by the is not a requirement for attachment; an unregistered charge is lenders), and the claims of floating charge holders, preferential effective against the company provided it is not in or creditors and unsecured creditors (see Question 2). .

Movable property Pledges and liens do not require registration.

Common forms of security. The most common forms of security Security over certain assets may also require registration at specialist over movable property are: registers (for example, land, certain intellectual property rights,

„„ Mortgage and fixed charge. See above, Immovable property. ships and aircraft).

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Effects of non-compliance. If these security interests are not sometimes provide for title to be retained by the trade creditor until registered, these charges will be void against secured creditors, all outstanding amounts due to the trade creditor have been paid and against a or administrator and creditors generally (and not simply the price for the particular goods sold). in a liquidation. Difficult issues can arise where goods which are subject to a retention of title clause are mixed or incorporated with other CREDITOR AND CONTRIBUTORY RANKING goods as part of a manufacturing process or the clause provides that, if the buyer sells the goods, it must account to the trade 2. Where do creditors and contributories rank on a debtor’s creditor for the sale proceeds. insolvency?

4. Can creditors invoke any procedures (other than the formal In corporate , creditors and shareholders are paid in rescue or insolvency procedures described in Question 6 the following order of priority: and 7) to recover their debt? Is there a mandatory set-off of mutual debts on insolvency? „„ Fixed charge holders. Fixed charge holders are paid up to the amount realised from the assets covered by the fixed charge (net of the costs of realising those assets). If the value of Court judgment the charged assets is less than the amount of the debt, the charge holder can claim the balance as an An unpaid creditor can bring proceedings against a debtor seeking (or under any valid floating charge in its favour). a judgment for the debt. If the debt is undisputed, judgment can be sought on a summary basis. „„ Liquidators. Liquidators’ fees and expenses have priority over preferred creditors and floating charge holders (subject Once judgment has been obtained, the creditor can enforce it by to restrictions relating to certain expenses which have not seeking either: been authorised or approved by floating charge holders, „„ A charging order over the debtor’s property. by preferential creditors or the court) (see Question 14, Insolvency expenses regarding liabilities under financial „„ An order requiring a third party to pay a receivable due to support directions issued by the Pensions Regulator). the debtor to the judgment creditor instead.

„„ Preferred creditors. Preferred creditors are mainly employees with labour-related claims (such as unpaid wages and contributions to occupational pension schemes). Receivership is an out-of-court enforcement mechanism for secured creditors. If the debtor defaults under the relevant „„ Floating charge holders. Floating charge holders are paid up security documents, the can appoint a receiver to the amount realised from the assets covered by the floating over secured assets to satisfy its debt. charge. From 15 September 2003, part of the proceeds from realising assets covered by the floating charge must Any duty the receiver owes to the company, its directors, other be set aside and made available to satisfy unsecured debts creditors and shareholders is secondary to the receiver’s duty to (prescribed part). The prescribed part is calculated as 50% realise the charged assets on behalf of the appointing chargee. of the first GB£10,000 of net floating charge realisations and 20% of the remainder, subject to a cap of GB£600,000. The There are two main types of receivership under English law:

Country Q&A prescribed part must not be distributed to floating charge „„ Administrative receivership. Under the holders, unless the claims of unsecured creditors have been (see Question 6, Administrative receivership). satisfied and there is a surplus. „„ Fixed charge receivership. Where the creditor has fixed „„ Unsecured creditors. Unsecured creditors are creditors who charges over specific assets, the creditor can appoint one or do not have a security interest in the debtor’s assets. more fixed charge receivers over those specific assets. The „„ Interest. Interest incurred on all unsecured debts post- receiver’s main function is to sell the charged assets and to liquidation. account to the creditor for the sale proceeds (net of costs). A fixed charge receiver need not be an authorised insolvency „„ Shareholders. Any surplus goes to the shareholders practitioner. according to the rights attached to their shares. Insolvency set-off UNPAID DEBTS AND RECOVERY The rules of insolvency set-off are mandatory and cannot be varied by contract. Where a creditor proves in a liquidation or 3. Can trade creditors use any mechanisms to secure unpaid administration (see Question 6 and Question 7, Liquidation), debts? Are there any legal or practical limits on the operation an account must be taken of the mutual dealings between the of these mechanisms? creditor and the company in liquidation or administration. The sums due from one party will be set off against the sums due from the other, except that sums due from the insolvent party will not The main mechanism used by trade creditors to secure unpaid be taken into account if the other party had notice, at the time debts is a retention of title clause in sale contracts. This provides they were incurred, of: that title in goods does not pass from the trade creditor to the buyer „„ A resolution or petition to wind up. until it has received full payment for the goods. These clauses

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). The administration procedure is a way of facilitating The administration procedure is a way of www.practicallaw.com/restructure-mjg An administrator can be appointed by court order. An An administrator can be appointed by court order.

jurisdiction? What are the main rescue/reorganisation procedures in your What are the main rescue/reorganisation procedures One or more creditors of the company. One or more creditors of the company. A company through its directors or shareholders. Qualifying floating charge holders. The company. directors. The company’s „ „ „ „ „ „ There is also an out-of-court procedure for placing a company in administration, which is available to both: „ „ Objective. of its assets. It a rescue of a company or the better realisation trade with protection allows an insolvent company to continue to moratorium ( statutory a through creditors its from Conclusion the company as a The main aim of administration is to rescue if the administrator thinks this is not going concern. However, can be achieved for reasonably practicable or that a better result is to achieve a better creditors as a whole, the second objective if the company is creditors than is likely result for the company’s wound up (without first being in administration). The third objective, which only applies if the administrator thinks it is not reasonably practicable to achieve the first two objectives and if it will not “unnecessarily harm” the interests of the creditors as a whole, is to realise property to distribute the proceeds to the secured or preferential creditors. The 2002 Act does not explain what constitutes “unnecessarily harming” and it still remains to be seen what practical impact this will have on an to sell assets. decision administrator’s Initiation. application is usually made by: „ „ Enterprise Finance Guarantee Enterprise Enterprise launched the 2009 the UK government In January guarantee scheme loan a is The EFG (EFG). Guarantee Finance and small to lending bank additional facilitating at aimed (SMEs) with viable business cases but medium-sized enterprises a government- By providing lenders with insufficient security. aim is to facilitate lending that would backed guarantee, the SMEs can obtain that to ensure and otherwise not be available investment they require. the working capital and Service Business Payment Support HM Revenue & Customs (HMRC) introduced In late 2008, the UK Support Service (BPSS) to meet the needs a Business Payment is by the economic downturn. The BPSS of businesses affected in difficulties experiencing are who businesses all to available review HMRC the Although time. on and full in due tax paying is scope to suggest each case on an individual basis, there tailored options (such as arranging for tax payments to temporary, be made over a longer period). PROCEDURES RESCUE AND INSOLVENCY 6. Administration about this publication, please visit please visit about Practical Law Company, for reform proposals). Question 14 FOR MORE FOR INFORMATION Is state support for distressed businesses available? Is state support for distressed businesses facilitate a private sector solution. business to a publicly of all or part of the bank’s Transfer controlled ‘’bridge bank’’. of the bank into temporary public sector ownership. Transfer Transfer of the banking business to a third party, to business to a third party, of the banking Transfer An application for an administration order or notice of an order or notice of for an administration An application appoint an administrator. intention to „ „ „ „ modifications. of stabilisation powers and compliance with EU commitments, particularly state aid. The 2012 Act also extends the SRR and the bank administration procedure to investment firms as it applies to banks and the SRR to UK clearing houses with certain introduced by the Financial Services Act 2012 (2012 Act). (2012 2012 Act Services Financial the by introduced These largely relate to technical amendments to the SRR, in particular changes to reporting requirements following the use bank” under the SRR and a bank administrator is appointed byappointed is administrator bank a and SRR the under bank” the court to administer the affairs of the insolvent residual bank. Certain amendments to the 2009 Act have recently been liquidation provisions of the Insolvency Act 1986. The new bank administration procedure is to be used when part of the business of a “bridgeto transferred or party a third to sold been has bank the The 2009 Act also introduces new insolvency and administration regimes for banks and building societies. The main features of the existingprimarily on the based are procedure insolvency bank new „ „ three stabilisation options in relation to UK banks: three stabilisation options in relation to UK „ authorities various powers to deal with banks and other deposit- authorities various powers to deal with banks mechanisms are rescue The failing. are which institutions taking the SRR provides for referred to as “stabilisation powers” and The Banking Act 2009 (2009 Act) came into force in February The Banking Act 2009 (2009 Act) came the 2009 Act is the 2009. The most significant aspect of gives the government special resolution regime (SRR) which 5. for banks Special rescue and insolvency procedures STATE SUPPORT STATE remedies available under national law. Further details, including the remedies available under national law. implementation,application procedure and time frame for possible are still under discussion (see has recently approved draft proposals for the freezing and disclosurehas recently approved draft proposals for the proposed remediesof ’ assets in cross-border cases. The freezing orders (andappear to be similar in nature to English law in addition to thoseancillary disclosure orders) and would be The process to recover cross-border debts is complex and the costsThe process to recover a debtor with assets in several memberof recovering a debt from European Parliament the However, states can often be prohibitive. by the administrator with retrospective effect as at the date of with retrospective effect as at the date by the administrator administration. Cross-border debt recovery In the case of an administration, insolvency set-off takes place as place takes set-off insolvency an administration, of case the In notice of the intended distribution is issued at the date on which All amounts, including future, contingent and unliquidated sums, future, contingent and unliquidated sums, All amounts, including are brought into account. „ MULTI-JURISDICTIONAL GUIDE 2013/14 GUIDE MULTI-JURISDICTIONAL INSOLVENCY AND RESTRUCTURING MULTI-JURISDICTIONAL GUIDE 2013/14 RESTRUCTURING AND INSOLVENCY

Administration is potentially available to both UK and foreign- Length of procedure. The administrator’s appointment terminates registered companies. The rules concerning cross-border one year after the date the appointment took effect. However, insolvencies are complex but the availability of the administration the appointment can be extended by the court for a specified procedure generally depends on a company’s centre of main period, or with the creditors’ consent for a period not exceeding interest (COMI) being located in the UK. A company’s COMI six months. depends on where it conducts the administration of its interests on a regular basis and should be ascertainable by third parties Conclusion. An automatic statutory moratorium, which comes (see Question 13). into effect when an application for administration or a notice of intention to appoint an administrator is filed, helps the Substantive tests. In most cases, an administration cannot begin administrator achieve the objectives of the administration. The unless it can be demonstrated that both: moratorium is a stay on creditors from taking any legal action or enforcing their security against the company or its property. „„ The company is, or is likely to become, unable to pay its debts. There is no direct impact on employees if an administrator is appointed „„ Administration is likely to achieve one of the purposes (see and the procedure does not interfere with company contracts. above, Objective). The way in which an administration is concluded depends on its If a qualifying floating charge holder appoints an administrator, objective. Administration usually results in one or more of the there is no requirement for the company to be insolvent, following: although the floating charge underlying the appointment must „„ The administrator selling the company’s assets and be enforceable. distributing their proceeds to creditors and shareholders.

Consent and approvals. Where the court appoints the administrator, „„ A composition of creditors’ claims through a company the applicant must notify any qualifying floating charge holder. voluntary arrangement (see below, Company voluntary If a qualifying floating charge holder has already appointed an arrangement). administrator or administrative receiver, the court does not usually „„ A (see below, Scheme of arrangement). grant an administration order. Where the appointment is made out of court, the company or its directors must give all persons „„ Liquidation and of the company (see Question holding a qualifying floating charge five business days’ written 7, Liquidation). notice of their intention to appoint an administrator, who must also be identified in the notice. This is to enable a qualifying floating Company voluntary arrangement charge holder to appoint its own administrator if it does not approve Objective. A company voluntary arrangement (CVA) is a form of of the company’s or directors’ proposed choice. statutory composition between a company and its creditors. Its aim is to enable a company in financial difficulty to propose a Supervision and control. One or more licensed insolvency compromise or arrangement with its creditors. practitioners can be appointed as administrators. The administrators: Initiation. A CVA can be commenced by a company’s directors, or

„„ Are officers of the court (whether or not appointed by the if the company is already in administration or liquidation, by the court) and act as the company’s agent. company’s administrators or liquidators.

Country Q&A „„ Have very extensive management powers (see Question 11). A copy of the proposed arrangement is filed in court, but the court has no active involvement in the procedure. While it does „„ Have investigatory and enforcement powers, including powers to apply to the court to unwind pre-insolvency not need to be prefaced by an administration, it is often used transactions (see Question 10, Challenging pre-insolvency in conjunction with administration because a CVA does not transactions). itself provide for a moratorium unless the company is a “small company” (this is based on the company’s financial returns). The directors’ management powers generally cease although A CVA is available to the same companies as for administration the administrator may leave some or all of the powers with the (see above, Administration: Initiation). directors of the company. (For information regarding carrying on the business during insolvency, see Question 11.) Substantive tests. There are no formal requirements that a company must satisfy to be placed into this procedure. Therefore, Protection from creditors. See below, Conclusion. The the company does not need to demonstrate that it is, or is likely administration does not prevent trading parties cancelling to become, insolvent. contracts with the company. It is a typical term of many contracts (including intellectual property licences) that the agreement may Consent and approvals. A CVA must be approved by creditors be terminated upon the company entering into an insolvency holding at least 75% in value of the claims held by all unsecured procedure, such as administration. The administrator is given creditors voting at a meeting convened for this purpose. no power (unlike a liquidator; see Question 7, Liquidation) to Shareholders must also approve the CVA by a majority vote, but disclaim onerous property. However, an administrator can cause if the creditors approve the CVA and the shareholders do not, the insolvent company to breach the terms of the contract and the creditors’ approval prevails (although dissenting shareholders allow the counterparty to sue for damages. If successful, the can challenge the CVA by applying to the court on the grounds of counterparty would rank as an unsecured creditor. unfair prejudice or procedural irregularity).

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.) There is no moratorium so creditors There is no moratorium The directors of the company remain The directors of the No consent or approval is required. Question 11 The duration of a scheme depends on its terms. The duration of a scheme The appointment of an administrative receiver www.practicallaw.com/about/practicallaw

Once the scheme has been sanctioned by the court Once the scheme has been sanctioned by www.practicallaw.com/restructure-mjg Any holder of a floating charge over all or substantially or all over charge floating a of holder Any Administrative receivership is an out-of-court enforcement Administrative receivership is an out-of-court

Voted to reject the scheme. Voted Did not attend the scheme meeting. Did not receive notice of the scheme. „ „ „ Substantive tests. is subject to the enforcement provisions contained in the security documents. Consent and approvals. There is no direct impact on employees and the procedure does There is no direct impact on employees and not interfere with company contracts. with its terms and the The scheme is concluded in accordance company reverts to its former status. Administrative receivership Objective. of legislative changesmechanism for secured creditors. As a result Act), this processintroduced by the Enterprise Act 2002 (2002 andsecuritisations for only generally and rarely, very used now is regulated industries. The mechanism is used to realise assets to satisfy a secured receiver owes to debt. Any duty the administrative creditor’s its directors, other creditors and shareholders is the company, secondary to his duty to realise the charged assets on behalf of the appointing secured creditor. Initiation. 15 September 2003 assets created before all of a company’s can appoint one or more administrative receivers after an event of default. Subject to certain limited exceptions, the changes introduced by the 2002 Act now prevent the appointment of an administrative receiver in relation to floating charges created after 15 September 2003. Administrative receivership is available to a company incorporated in the UK. (in person or by proxy) vote in favour of it. Once all required favour of it. Once or by proxy) vote in (in person the at the scheme meetings, approved the scheme classes have or approve it. the court to sanction parties request Supervision and control. business the on carrying regarding information (For control. in see during insolvency, Protection from creditors. action against the company up until the can take enforcement is sanctioned. In relation to company which the scheme point at position is that a scheme will not interfere contracts, the default the company. with the contracts of Length of procedure. Conclusion. House, it binds the and a copy of the order filed at Companies did who creditors any including creditors, its of all and company any of the following: „ „ „ class approves the Secured creditors can also be bound if their scheme. ). about this publication, please visit please visit about Practical Law Company, see above, Company voluntary .) FOR MORE FOR There is generally no protection but There is generally no If a proposal for a CVA is approved, it for a CVA If a proposal All classes of creditors affected by the of creditors affected by All classes see above, Administration The duration of a CVA depends on its terms. The duration of a CVA . The company must be liable to be wound up Question 11 ), a scheme of arrangement (scheme) enables a of arrangement (scheme) enables a scheme ), The CVA binds the company and all creditors, The CVA Like a CVA ( Like a CVA A scheme can be initiated by the company itself or by A scheme can be initiated by the company INFORMATION Consent and approvals. Consent scheme must approve the scheme. A class approves the scheme if at least 75% in value and more than half in number of the creditors in that class present and voting at the scheme meeting in the UK, but does not need to show that it is (or is likely to likely is (or is it that show to not need does but UK, the in become) insolvent. has its centre of main interest or an establishment in the UK or potentially some other sufficient connection. Substantive tests A scheme is generally available to companies registered in the case of a non-UK it may also be available in the UK. However, registered company which could be wound up in the UK, if it creditor actions, when they are used in restructuring scenarios, does which administration, with in tandem are often used they provide a moratorium ( complex, time consuming and can be costly, as it involves both complex, time consuming and can be costly, applications to court and meetings of the various classes of creditors and shareholders who may be affected by the scheme. Since the preparatory steps of a scheme are not protected from Initiation. relatively is process The liquidator. or administrator company’s the Objective. arrangement with its creditors company to reach a compromise or arrangement or with certain classes of its creditors. directors and shareholders. Scheme of arrangement not interfere with company contracts. The is concluded once its terms have been implemented. A CVA control returns to its company reverts to its former status and not bind secured creditors unless they consent to be bound by it. not bind secured creditors unless they consent the procedure does There is no direct impact on employees and received notice of it (although any creditor who did not receiveof it received notice theto treatment under meeting is entitled of the creditors’ notice the as if he received notice of it, and has 28 days to challenge CVA does the CVA from the date he becomes aware of it). However, CVA Length of procedure. Conclusion. creditors’ meeting orirrespective of whether they attended the to company contracts, the default position is that a CVA will not the default position is that a CVA to company contracts, of the company. interfere with the contracts Protection from creditors. of processes, including the enforcement a moratorium on legal a CVA. is available for small companies contemplating security, between one and three months. In relation The moratorium lasts control. (For information regarding carrying on the business duringcontrol. (For information see insolvency, is normally implemented under the supervision of a licensed the supervision of implemented under is normally everything directors must do The company’s practitioner. insolvency assets of the company into the handspossible to put the relevant otherwise remain in directors do, however, The of this supervisor. Supervision and control. Supervision MULTI-JURISDICTIONAL GUIDE 2013/14 GUIDE MULTI-JURISDICTIONAL INSOLVENCY AND RESTRUCTURING MULTI-JURISDICTIONAL GUIDE 2013/14 RESTRUCTURING AND INSOLVENCY

Supervision and control. The administrative receiver controls the While the rules relating to cross-border insolvencies are complex, affairs of the company. The directors’ powers of management are CVL and compulsory liquidation are potentially available to suspended. (For information regarding carrying on the business both UK and foreign-registered companies, provided they during insolvency, see Question 11.) can demonstrate they have their centre of main interest or an establishment in the UK or potentially some other sufficient Protection from creditors. The appointment of an administrative connection. MVL is only available to companies incorporated in receiver does not create an automatic moratorium. Creditors the UK. can therefore commence or continue legal actions against the company. In relation to the treatment of company contracts, Substantive tests. The most common ground on which creditors the position is broadly similar to administration (see above, petition the court for a compulsory winding-up order is that the Administration: Protection from creditors) in that the appointment company is unable to pay its debts, which is deemed if any of the of an administrative receiver does not affect company contracts following occur: unless provided for in the contract itself. „„ A creditor who is owed more than GB£750 by the company serves a statutory demand on the company and the Length of procedure. There is no time limit, but an administrative company fails to pay. receiver usually seeks to realise and distribute assets as quickly as possible. „„ A judgment remains unsatisfied.

Conclusion. Administrative receivers have the power to sell all or „„ It is proved to the court that the company is unable to pay part of the company’s business and assets to satisfy the secured its debts as they fall due.

creditors’ claims. „„ It is proved to the court that the company’s liabilities (including contingent and prospective liabilities) are more There is no direct impact on employees and the procedure does than the company’s assets. not interfere with company contracts. A court can also wind up a company if it can be shown that it is Once a sale has occurred and the administrative receiver has just and equitable to do so. accounted to the secured creditor for the proceeds of sale (net of costs), control of the company is returned to the directors for An MVL must be supported by a statutory declaration sworn by either continued operations or final liquidation see( Question 7, the directors that the company will be able to pay its debts in full, Liquidation). together with interest, within 12 months of the start of the MVL.

Consent and approvals. Resolutions for MVL and CVL must 7. What are the main insolvency procedures in your jurisdiction? be approved by 75% of shareholders voting at the relevant shareholders’ meeting. A CVL also requires approval by a majority Liquidation by value of the company’s creditors at a meeting called for that purpose. A court order is required to place a company into Objective. There are two types of liquidation: compulsory liquidation. „„ Voluntary liquidation. This is not a court proceeding and can be started in relation to a solvent company (members’ Supervision and control. See below, Conclusion and, for further voluntary liquidation (MVL)) and an insolvent company information regarding carrying on the business during insolvency, Country Q&A (creditors’ voluntary liquidation (CVL)). see Question 11.

„„ Compulsory liquidation. This is a court proceeding. Protection from creditors. See below, Conclusion.

Liquidation is used to wind up a company, and realise and Length of procedure. This depends on the substance of the distribute its assets to creditors and shareholders. liquidation and the company’s situation.

Initiation. Voluntary liquidation is initiated by a shareholders’ Conclusion. Compulsory liquidation (unlike an MVL or CVL) resolution to wind up the company. Compulsory liquidation is provides for an automatic stay or moratorium by prohibiting any started by the presentation of a petition to the court by any of action or proceedings from being started or continued against the following: the company or its property, without leave of the court. Once the court makes a winding-up order, the company’s directors are „„ The company. automatically dismissed and replaced by the liquidator, who is „„ The company’s shareholders. vested with extensive powers to act in the name of the company (see Question 11). „„ The company’s directors.

„„ The company’s creditors. On a compulsory liquidation and CVL, employees’ service contracts are automatically terminated, unlike an MVL. A company and its directors are not required to file for liquidation on insolvency, but may wish to do so to avoid incurring liability for Company contracts are not automatically terminated but a wrongful or (see Question 9). liquidator has the ability to terminate onerous contracts under section 178 of the Insolvency Act 1986 to facilitate a winding-up.

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) or a preference, and The court can set aside a see above, Preferences Floating charges created by an www.practicallaw.com/about/practicallaw A preference is a transaction by a company

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the company enters into the transaction in good faith the company enters into the transaction in and for the purpose of carrying on its business; for believing at the time, there were reasonable grounds that the transaction would benefit the company. „ „ see above, Transactions at an undervalue see above, Transactions aside? If so, who can challenge these transactions, when and when transactions, challenge these can who so, If aside? Are third parties’ rights affected? in what circumstances? Can an insolvent debtor’s pre-insolvency transactions be set pre-insolvency transactions Can an insolvent debtor’s Generally, a transaction is only a transaction at an undervalue Generally, ( a floating charge is only avoided, if at the time the company enters into the transaction or creates the charge, it is unable to pay its debts or becomes unable to do so as a consequence of the transaction or preference. transaction entered into by a company for no consideration, transaction entered into by a company for the value of the or for significantly less consideration than transaction, unless both: „ „ Preferences. putting surety or guarantor by that prefers a creditor, that party (in a hypothetical insolvent liquidation of the company), into a better position than that party would have been in if the transaction had not taken place. The court can set aside a preference if there is evidence that the company was influenced by a desire to prefer the creditor. The vulnerable period is six months before liquidation or administration starts, unless the preferred creditors are connected to the company (for example, the company’s directors), in which case the period is two years. of floating charges. Avoidance insolvent company in the year before the insolvency are invalid, except to the extent of the value of the consideration given to the company by the lender when the charge was created. This period is extended to two years where the charge was created in favour of a “connected person” ( Transactions at an undervalue. Transactions The vulnerable period is two years before the start of The vulnerable period is two years before the liquidation or administration. „ „ „ „ „ If an insolvent company is an employer with an occupational employer with an occupational company is an If an insolvent can, the pensions regulator pension scheme, defined benefit who are notices on persons circumstances, serve in certain with the company (including other connected or associated group, directors and shareholders with members of a corporate control), which may make them liable one-third or more voting obligations. pension for the company’s TRANSACTIONS SETTING ASIDE 10. Challenging pre-insolvency transactions liquidation or administration, the liquidator or On a company’s to avoid or unwindadministrator can apply to the court for an order The insolvency. the before place took that transactions certain orders if it determinescourt has wide discretion to grant these avoided or unwound.that a pre-insolvency transaction should be to the position itThe overriding principle is to restore the company had not occurred. would have been in if the improper transaction as follows: The transactions that can be set aside are „ about this publication, please visit please visit about Practical Law Company, A liquidator, any A liquidator, FOR MORE FOR Any person who is or was knowingly A successful action imposes INFORMATION other party be held liable for an insolvent debtor’s debts? debtor’s other party be held liable for an insolvent of a restructuring or insolvency procedure? Can stakeholders orof a restructuring or insolvency influence the outcome of the procedure?commercial/policy issues Can a director, partner, parent entity (domestic or foreign) or parent entity (domestic partner, Can a director, Which stakeholders have the most significant role in the outcome the in role significant most the stakeholders have Which time, they took every step to minimise the potential loss to the with a creditors. This allows directors to continue company’s restructuring if they conclude that there is a reasonable prospect of avoiding liquidation and improving the return to creditors. Wrongful trading. Wrongful personal liability on directors if they allow a company to or ought reasonably to have continue trading after they knew, known, that there was no reasonable prospect of avoiding a wrongful it is a defence to insolvent liquidation. However, trading action if the directors can show that, from the relevant forming or managing the company, in connection with any forming or managing the company, alleged or breach of fiduciary or other duty. Fraudulent trading. a party to the carrying on of business by a company with intent to defraud creditors may be liable to contribute to the be imposed assets. Criminal penalties may also company’s for fraudulent trading even if the company is not insolvent. Misfeasance or breach of fiduciary duty. creditor or any contributory can bring proceedings against any officer of the company or anyone involved in promoting, „ „ „ „ „ company’s assets are as follows: company’s „ The main ways in which a company’s directors (including de facto directors The main ways in which a company’s and shadow directors) can be held liable to contribute to the 9. crisis, operate more efficiently and where necessary, make a fresh necessary, crisis, operate more efficiently and where start, is a key element in these policy objectives. LIABILITY and in the present climate it is a high political priority to promote to priority political high a is it climate present the in and boost investment and safeguard employment. economic recovery, survive the financial Rehabilitation of debtors so that they can In relation to commercial or policy issues that affect the outcome In relation to commercial or policy issues that economic current the procedure, insolvency or restructuring the of and businesses downturn clearly has a direct effect on employees required to vote on the acceptance of a restructuring proposal and arequired to vote on the acceptance of a restructuring majoritiesstatutory the if defeated be can scheme or CVA proposed of creditors do not vote in favour of it. creditors and the company outside of any statutory procedure. creditors and the company outside of any Influence on outcome of procedure and lenders) are the creditors (including bondholders Typically, Stakeholders procedures are favourable to senior While English insolvency involve negotiations between lenders, most STAKEHOLDERS’ ROLES STAKEHOLDERS’ 8. company’s assets and, where applicable, made distributions to made distributions and, where applicable, assets company’s shareholders. creditors and The company is dissolved once the liquidator has realised all the the liquidator has realised is dissolved once The company MULTI-JURISDICTIONAL GUIDE 2013/14 GUIDE MULTI-JURISDICTIONAL INSOLVENCY AND RESTRUCTURING MULTI-JURISDICTIONAL GUIDE 2013/14 RESTRUCTURING AND INSOLVENCY

„„ Transactions defrauding creditors. This is similar to a ADDITIONAL FINANCE transaction at an undervalue (see above, Transactions at an undervalue), but the court only makes an order to unwind a 12. Can a debtor that is subject to insolvency proceedings obtain transaction if it is satisfied the transaction was entered into additional finance both as a legal and as a practical matter to defraud creditors by putting assets beyond the reach of (for example, debtor-in-possession financing or equivalent)? claimants against the company. No time limit applies for Is special priority given to the repayment of this finance? unwinding the transaction.

„„ Dispositions after the start of winding-up. Any disposition of a company’s property made after winding-up has started is Administration and liquidation void, unless the court orders otherwise. This provision can An administrator or liquidator can raise money on the security cause difficulties, as a compulsory winding-up is deemed to of the unencumbered assets of the company. Such additional start when the petition is presented, rather than on the date funding has priority over all claims (other than those secured by a of the court order. fixed charge) as an expense of the administration or liquidation.

Third party rights CVA and scheme of arrangement The rules concerning third party rights in pre-insolvency The raising of finance and the use of assets as security tends to transactions are complex. Although third party rights may be be a matter for agreement between the company and its creditors. affected, there is generally protection for bona fide purchasers Typically, the company will look to its existing lenders to provide acquiring property or benefits for value without notice of the additional funding. relevant circumstances. Persons who are not direct recipients, parties to the transaction, or connected with the company or the MULTINATIONAL CASES parties to the transaction, are usually accorded a broad defence. 13. What are rules that govern a local court’s recognition of concurrent CARRYING ON BUSINESS DURING INSOLVENCY foreign restructuring or insolvency procedures for a local debtor? Are there any international treaties or EU legislation governing 11. In what circumstances can a debtor continue to carry on this situation? What are the procedures for foreign creditors to file business during rescue or insolvency proceedings? In particular, claims in a local restructuring or insolvency process? who has the authority to supervise or carry on the debtor’s business during the process and what restrictions apply? Recognition Section 426 of the Insolvency Act 1986 provides a statutory Administration. On appointment, an administrator assumes framework for the reciprocal co-operation with English courts in management of a company and, although the directors usually relation of a number of former UK colonies and dependencies. remain in place, they cannot exercise any powers in a manner When considering whether to provide assistance, the court can that is inconsistent with the administration (directors can be apply substantive English insolvency law or the law of the foreign dismissed by the administrators at any time). jurisdiction if it is consistent with English law.

The administrator can do anything necessary or expedient for the Regulation (EC) 1346/2000 on insolvency proceedings () requires the English courts to automatically recognise

Country Q&A management of the company’s affairs, business or property, such as: insolvency proceedings started in other EU member states and contains detailed provisions on concurrent proceedings in different „„ Sell the company’s assets. member states (see below and Question 14, Proposed amendments

„„ Borrow money on behalf of the company. to the Insolvency Regulation).

„„ Bring or defend proceedings. Directive 2001/24/EC on the reorganisation and winding up of credit institutions provides for a single set of winding-up or During the administration, the administrator must report to reorganisation proceedings to be commenced in the EU member creditors and seek approval for his proposals. If a creditor believes state in which a credit institution has been authorised to take up that the administration is not being conducted properly, he can its business. Subject to certain exceptions, the home member apply to court for the removal of the administrator. state’s insolvency rules apply throughout the EU and any decision relating to the commencement of reorganisation or winding-up CVA and scheme of arrangement. The directors remain in control of the procedures is automatically effective in another member state. company, continue to trade and undertake the company’s business, unless otherwise provided by the terms of the CVA or scheme. Concurrent proceedings The UNCITRAL Model Law on Cross-Border Insolvency 1997 was Liquidation. Once the court makes a winding-up order, the company’s implemented in England and Wales on 4 April 2006 by the Cross- directors are automatically dismissed and replaced by the liquidator Border Insolvency Regulations 2006. The Regulations provide who is vested with extensive powers to act on the company’s behalf. uniform legislative provisions to deal with cross-border insolvency The liquidator can continue to operate the company’s business if and promote: this achieves better realisation of the assets than an immediate liquidation, but it is rare for a liquidator to do so. „„ Co-operation between the courts and competent authorities involved in cases of cross-border insolvency.

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Question 4, Cross-border debt recovery See also As the final phase of the modernisation work, the Insolvency work, the phase of the modernisation As the final which will new set of Rules to produce a Service intends It is the Insolvency Rules. and entirely replace restructure set of Rules will be published during anticipated that a draft Rules will not come into force before 2013 although the new earliest. The ongoing delays have occurred October 2014 at the Challenge” Tape “Red the government’s partly as a result of the latter part of 2012, gave interested programme which, during to comment on insolvency legislation that parties the opportunity overly complicated. was considered to be to the Insolvency Regulation Proposed amendments EU Commission outlined new legislative In December 2012, the Regulation. plans to update the Insolvency in emphasis from Under the current proposals there is a shift across Europe to recognition of formal insolvency proceedings The proposals promoting pre-insolvency and rescue procedures. faced in cross- also recognise some of the practical challenges the extent to which border insolvency cases and seek to increase co-operate in those insolvency office holders and courts should cases, including in group company situations. Regulation will be The proposal for an amended Insolvency also the Council of considered by the European Parliament and proposals current the then, Even adopted. is it before EU the once the amending suggest a lead-in time of up to two years regulation becomes effective. about this publication, please visit please visit about Practical Law Company, FOR MORE FOR ) that liabilities under financial support directions issued by) that liabilities under financial support directions INFORMATION Are there any proposals for reform? remote attendance at creditors’ meetings. insolvency events. Enabling an insolvency office holder to recover costs and expenses incurred before his appointment as an expense of the administration. Facilitating the delivery of documents electronically between insolvency office holders and creditors and allowing A more flexible regime for the advertising and/or publicity of Insolvency Regulation. Regulations 2006. Cross-Border Insolvency The protection and maximisation of the value of the debtors’ The protection and maximisation assets. troubled businesses. The rescue of financially Fair and efficient administration of cross-border insolvency of cross-border insolvency administration Fair and efficient creditors and other the interests of all that protects persons, including debtors. interested „ „ „ „ „ „ „ „ Bloom and ors v The Pensions Regulator and ors [2010] EWHCBloom and ors v The Pensions Regulator and „ „ „ a series of modernisation changes to the Insolvency Rules (which supplement the Insolvency Act 1986). Some of the most important changes include: and the case has been provisionally listed for May 2013. The Insolvency Rules Over the last few years, the Insolvency Service has implemented enable it to issue companies with financial support directions, and the priority of claims in administration. The decision has importance its public given the Supreme Court to been appealed holders and unsecured creditors in the insolvency process. holders and unsecured creditors in the insolvency The ruling has a significant impact both on the status of the powers, which so-called “moral hazard” Pensions Regulator’s the Pensions Regulator against companies after they have gone intothe Pensions Regulator against companies after of the administration,administration should be treated as an expense above floating chargerather than provable debts and, therefore, rank In October 2011 the Court of Appeal confirmed the High CourtIn October 2011 the Court of Appeal confirmed and Lehman Brothersjudgment in the cases of Nortel Networks ( 3010 (Ch) Insolvency expenses REFORM 14. However, to ensure that local creditors are not prejudiced, if However, any recovery made in there are concurrent proceedings abroad, taken into account. the foreign insolvency proceedings will be Generally, foreign creditors can file claims for debts due to Generally, same manner as local them in UK insolvency proceedings in the into sterling. are converted Foreign currency debts creditors. „ creditors Procedures for foreign International treaties International treaties treaties apply: The following international „ „ „ „ MULTI-JURISDICTIONAL GUIDE 2013/14 GUIDE MULTI-JURISDICTIONAL INSOLVENCY AND RESTRUCTURING MULTI-JURISDICTIONAL GUIDE 2013/14 RESTRUCTURING AND INSOLVENCY

CONTRIBUTOR PROFILES

JAMES ROOME TOM BANNISTER Managing Partner of Bingham’s Partner London Office and Co-Head of the Bingham McCutchen (London) LLP firm’s Financial Restructuring Group T +44 20 7661 5300 Bingham McCutchen (London) LLP F +44 20 7661 5400 T +44 20 7661 5300 E [email protected] F +44 20 7661 5400 W www.bingham.com E [email protected] W www.bingham.com

Professional qualifications. England and Wales, 1984; Hong Professional qualifications. England and Wales, 2005 Kong, 1985 Areas of practice. Restructuring; insolvency. Areas of practice. Restructuring; insolvency. Recent transactions Recent transactions Advised noteholders, bondholders and other creditor groups Representing: in a number of significant workouts and restructurings of European companies, including the Quinn Group, Connaught „„ Noteholders of Atrium European Real Estate (formerly Meinl plc, Waterford Wedgwood, 20:20 Mobile, MJ Maillis, two major European Land), BAA, Concordia Bus, Damovo Group, UK homebuilders, Level One, Sea Containers Ltd, Pendragon, Elektrim, Focus DIY, Head NV, Independent News & Media, Johnston Press, Focus DIY, Nybron, IWP International plc, Irish Nationwide Building Society, Kremikovtzi, Marconi Cordiant Communications Group plc, Jarvis plc, Leeds United Corporation, Petroplus, Phoenix Pharmahandel, Preem Football Club, Marconi Corporation plc - an Irish household AB, Schefenacker, SwissAir, Truvo, Vantico International, and leisure products group, Albert Fisher Group plc, Mayflower Versatel Telecom International, Welcome Break, and Wind Corporation plc and Gate Gourmet. Hellas.

„„ Lenders in LBO restructurings, including Alliance Medical, Arcapita, Bulgaria Telecom, Europackaging, European PAUL DURBAN Directories, Findus, Gala Coral, Ineos, Mauser, Monier, Partner Schieder Möbel, TMD Friction and Viridian. Bingham McCutchen (London) LLP „„ A mezzanine syndicate on the restructuring of Level One, a T +44 20 7661 5300 real estate securitisation vehicle. F +44 20 7661 5400 E [email protected] „„ Numerous financial institutions in relation to prime broking, W www.bingham.com derivative and bond claims following the collapse of Lehman Brothers. Country Q&A „„ The junior debt holders on the restructuring of Queens Moat Professional qualifications. England and Wales, 2006 Houses. Areas of practice. Restructuring; insolvency. „„ The EGO BV bondholders in the administration of TXU Recent transactions Europe. „„ Acted as counsel to creditor groups in the restructurings of three major Icelandic banks, three major Irish financial Non-professional qualifications. Bachelor of Laws, Southampton institutions, Filmax Entertainment, Straumur-Burdaras University; Legal Practice Course, Lancaster Gate College of Law. Investment Bank, Damovo Group SA, Greycoat Limited, Kremikovtzi AD, Torex Retail plc, Leeds United plc, Meinl Professional associations/memberships. The Law Society of European Land, Nexus Floating Production, Pearl Group England and Wales; City of London Law Society (Insolvency Holdings and Northern Rock plc. Committee); Association of Business Recovery Professionals (R3); INSOL Europe; INSOL International; Insolvency Lawyers’ „„ Avised the institutional investors in secured and unsecured Association. private placements involving European companies such as Heijmans NV, Hampson and the Quinn Group.

„„ Advises on English insolvency law issues.

Non-professional qualifications. Legal Practice Course, BPP Law School; Postgraduate Diploma in Law, BPP Law School; Bachelor of Arts, History, University of Oxford, Balliol College.

Professional associations/memberships. The Law Society of England and Wales.

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