Corporate insolvency
1.What is a debenture?
A debenture is an ‘IOU’; a legal document acknowledging a debt, usually secured by fixed and floating charges over the company’s property. A charge gives the holder a ‘bundle of rights’ over the charged property, usually including the right to appoint an Administrative Receiver or Administrator should the terms of the debenture be breached. Debentures are usually issued in a standard form and on a ‘take it or leave it’ basis by the lender.
2. What is a fixed charge?
A fixed charge is held over specific, ascertainable assets and 'attaches' immediately on creation, meaning that the company is no longer free to deal with the assets without the charge-holder's authority. Its purpose is to secure lending, usually from a bank and it typically covers such assets as land, buildings, 'fixed' plant and machinery, goodwill, intellectual property and uncalled share capital.
3. What is a floating Charge?
A floating charge is a charge over assets that can change, such as stock and (following recent case-law) book debtors. The floating charge 'attaches' only on the occurrence of a particular event, such as formal insolvency or cessation of trading. This means that until then, the company is able to deal freely with charged assets in the ordinary course of business. In certain circumstances, a floating charge-holder (e.g. a bank) may appoint an Administrative Receiver or Administrator and receive funds from the realisations of the charged assets subject to payments to preferential creditors, or any 'prescribed part'.
4. What is a preferential creditor?
A preferential creditor is an unsecured creditor given preferential treatment by Insolvency legislation in the event of insolvency. They are payable from floating charge asset realisations in priority to the claims of the debenture holder, but it should be noted, there is no similar priority over fixed charge realisations.
Historically, preferential creditors have tended to be claims of the state and those relating to employees, such as the last 12 months of PAYE and last 6 months of VAT, plus an element of the Redundancy Payment Service's claim. The Enterprise Act 2002, however, introduced important changes and for all insolvencies that commenced after 15 September 2003, the Crown bodies no longer have a priority claim. Preferential claims are now restricted primarily to certain employee claims.
5. What is the 'Prescribed Part'?
The Enterprise Act 2002 attempted to divert part of the pool of floating charge assets (which in practice usually means all the company's assets not subject to a fixed charge) to unsecured creditors. The rule only applies to those charges that were created after 15 September, 2003, but for those cases, the effect of the rule is that the insolvency office holder (Administrative Receiver, Administrator, or Liquidator) must make a "prescribed part" of the company's "net property" available to unsecured creditors.
The amounts to be made available are 50% of the first £10,000, plus 20% of the balance subject to an overall cap on the prescribed part of £600,000. An office holder may however, in cases where a company's "net property" is less than £10,000, decide that the costs of distributing the funds are disproportionate and so effectively 'opt out' of the prescribed part.
6. What is retention of title (ROT)?
Trade suppliers to companies usually incorporate into their conditions of sale a particular clause that states, goods supplied...” The words “goods” and “supplied” have been transposed.
ROT clauses have become more sophisticated and comprehensive over the years and will often include additional safeguards, such as clauses relating to what happens when the goods are sold on before payment is made.
In practice, a valid ROT agreement may give the supplier the right to recover his goods or to be paid for them by an office-holder such as an Administrative Receiver.
It is however imperative that the supplier's terms and conditions are properly conveyed prior to the transaction concerned for it to be contractually binding and each case should be looked at on its own merits.
7. What is the difference between Administrative Receivership and Administration?
An Administrative Receiver (AR) is appointed by a
debenture-holder, usually a bank, which holds a floating charge over the whole, or substantially the whole, of a company's property. The primary duty of the AR is to maximise the return to his appointor. He also has a duty to pay preferential claims and to report to, and call a meeting of, ordinary unsecured creditors within 3 months of his appointment. He has no duty to deal with ordinary unsecured creditors claims and it is common for a company in Administrative Receivership to subsequently enter liquidation so that these claims can be dealt with by a liquidator.
The directors
usually initiate Administration, although it can also be by creditors and, if the debenture is post 15 September 2003, a floating charge-holder may also do so.
An Administrator may only be appointed for one of three statutory purposes and holds an equal duty to all creditors. Administration is more widely used where there is a possibility of selling the business as a going concern.
Both Administrative Receivers and Administrators must be Licensed Insolvency Practitioners.
Personal Insolvency
1. What is Bankruptcy?
Bankruptcy is a formal insolvency process whereby a Trustee (either the Official Receiver or an Licensed Insolvency Practitioner) realises the debtor's assets (subject to certain exceptions), and after paying the costs, distributes any proceeds to the creditors.
It commences when a bankruptcy petition is presented against an individual, either by that individual himself (debtor's petition), or by an unsecured creditor, or creditors, owed over £750 (creditor's petition). A Bankruptcy Order may be subsequently made in either the High Court in London, or in one of many County Courts across the country that have 'bankruptcy jurisdiction'.
The debtor remains in bankruptcy until he is discharged (normally after a maximum of 12 months) and for that time, he has certain restrictions placed upon him.
2. Why deals with bankrupt's estate?
Once the Order is made, the Official Receiver is automatically appointed Trustee. He will assess the debtor's financial situation and report to creditors to advise them of the assets and liabilities and provide an estimate of what, if any, dividend they might receive.
If the debtor has assets, a Licensed Insolvency Practitioner may be appointed as Trustee replacing the Official Receiver. This may either be at a meeting of creditors, or directly by the Secretary of State if an urgent appointment is needed, e.g. to protect perishable assets.
The Trustee will investigate the debtor's affairs and establish whether he has unfairly contributed to his financial position. He will also notify all creditors of the situation, who must then deal directly with him, not the debtor.
The Trustee will also seek to establish what assets, if any, the debtor has. This may involve contacting a number of parties, such as banks, building societies, mortgagors, landlords, sheriffs, bailiffs, The Land Registry and Companies House. In addition, the Official Receiver will invite creditors to advise him of any information they have.
3. What it is an Income Payments Order/ Income Payment Agreement (IPO/IPA)?
Both are schemes whereby the debtor pays a proportion of his surplus income to his Trustee or the Official Receiver, either as a consequence of a Court Order (IPO) or a voluntary agreement (IPA). These payments will normally continue for three years notwithstanding that the debtor may have been discharged from bankruptcy beforehand.
4. What is the difference between discharge and annulment?
Ordinarily, a debtor is automatically discharged from bankruptcy after 12 months, although if the Official Receiver is satisfied that all outstanding matters have been
dealt with, it may be after as little as 6 months.
The effect of discharge is that the debtor is free of all the restrictions that applied to him whilst in bankruptcy. It does not mean that any
unrealised assets will be returned to him and he still has a duty to cooperate with the Trustee and/or the Official Receiver.
An annulment is where the original Order is rescinded; it is in effect, as if it has never happened. To achieve this, the debtor must pay all his creditors, plus interest and the costs of the bankruptcy. In rare circumstances, a bankruptcy may be annulled where it can be shown that it should never have happened; i.e. if the correct procedure was not followed.
In an annulment, all the debtor's assets will be returned to him, but he will immediately assume responsibility for any creditors he may have.
5. What is an IVA?
An IVA (Individual Voluntary Arrangement) is an alternative to bankruptcy created by the 1986 Insolvency Act and may offer a better deal both to the debtor and his creditors. It involves the individual making a proposal to his creditors, which must be considered upon by an Insolvency Practitioner acting as a “Nominee” and a report made to Court. If the report is favourable, a meeting of creditors is summoned to enable creditors to vote on the arrangement. If the requisite majority (in excess of 75%) of creditors approve it, the Nominee will become the “Supervisor” whose job is then to ensure that the debtor adheres to the terms of the proposal.
Usually these days IVA proposals are based on contributions from income over a fixed period of time (usually 5 years), but they needn’t be. Other examples of proposals might be third party contributions (i.e. moneys that would not be available in bankruptcy),
sale of an asset over a longer period to increase realisations and thereby improve the position for the debtor and his creditors, or some combination of the above. These examples are not exhaustive!
The potential advantages for the debtor are that he is not subject to bankruptcy restrictions, the matter is not advertised and there is therefore
less stigma and, subject to his obligations to his Supervisor, the debtor remains in charge of his own affairs.
The creditors can gain in they will often receive a better return as no ‘ad valorum’ duty is payable,
moneys can be invested in an interest bearing account and, if the IVA provides for a contribution from income, the creditors may also benefit, as payments will be usually be paid for longer and at a higher rate than would be the case in bankruptcy.
An IVA however is most certainly not always the most suitable course of action in every case and too often debtors are lured into arrangements on the back of horror stories about bankruptcy told by debt counsellors and IVA ‘factories’. Usually the so-called advisor has little or no knowledge of bankruptcy or its implications and hence is unable to give proper or complete advice, or perhaps more pertinently, would not receive a fee were the individual enter bankruptcy instead of an IVA.
