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Last update: 29-09-2006
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Bankruptcy - England and Wales

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TABLE OF CONTENTS

1. What are the different types and aims of insolvency proceedings? 1.
2. What are the conditions for opening each type of insolvency proceedings? 2.
3. What is the role of the various participants in each type of proceedings? 3.
4. What are the effects of the opening of proceedings? 4.
5. What are the specific rules related to certain categories of claims? 5.
6. What are the rules relating to detrimental acts? 6.
7. What are the conditions for the lodgement and admission of claims? 7.
8. What are the rules relating to reorganisation proceedings? 8.
9. What are the rules relating to the winding-up proceeding? 9.
10. What are the conditions for the closure of the proceeding? 10.

 

1. What are the different types and aims of insolvency proceedings?

Insolvency is defined alternatively as having insufficient assets to meet all debts, or being unable to pay debts when they are due.

“Pre-insolvency” Proceedings

Companies and individuals can enter into formal arrangements with their creditors to accept less than the full amount they are owed, such arrangements are binding on all creditors that have notice of them.

Companies and individuals can enter into informal arrangements with their creditors to accept less than the full amount they are owed, such arrangements are not binding.

Corporate Insolvency Procedures

Administration

Principally designed as a procedure for rescuing the company or getting a better outcome for creditors than could be achieved in a winding-up. An administrator has to act in the interests of the creditors as a whole.

Administrative Receivership

An insolvency practitioner appointed by the holder of security under a floating charge that covers the whole or substantially the whole of the company’s assets. A floating charge is one that does not give the charge holder any immediate right in rem over the assets covered by the charge. The company is free to deal with the charged assets until such time as the charge crystallises. The administrative receiver’s task is to realise those assets on behalf of the charge holder and is primarily answerable only to the appointing floating charge holder.

Liquidation (Winding-up)

This involves the realisation and distribution of a company’s assets and usually the closing down of the business. There are three types of liquidation:

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  • Compulsory – where the court makes a winding-up order on the application of, usually, a creditor;
  • Creditor’s voluntary – where the company is insolvent and decides to wind itself up; and
  • Member’s voluntary – where the company is solvent and decides to wind itself up.

Personal Insolvency Procedures

Bankruptcy

This involves the realisation and distribution of an individual’s assets and usually the closing down of any business. People are made bankrupt by the court following an application of a creditor or the individual themself.

2. What are the conditions for opening each type of insolvency proceedings?

Corporate Insolvency Procedures

Administration

The company must be, or likely to become, unable to pay its debts, as defined by section 123 of the Insolvency Act 1986. In the case of a holder of a qualifying floating charge the only condition is that the charge must be enforceable.

The following can apply to the court for an administration order:

  • The company;
  • The directors;
  • One or more creditors of the company;
  • The justice’s chief executive for a magistrate’s court;
  • A combination of the above;
  • The supervisor of a company voluntary arrangement; and
  • The liquidator of the company.

The holder of a qualifying floating charge and the company or its directors can appoint an administrator by filing a notice at court.

Once appointed the administrator has to give notice of the appointment in a number of ways including placing an advert in the most appropriate newspaper and the London Gazette and sending a notice of the appointment to the Registrar of Companies and all known creditors.

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Administrative Receivership

The floating charge that the appointor holds over the company’s assets must be enforceable.

The terms for appointing an administrative receiver are regulated by the security documentation. A security document is any document that gives a creditor security over the assets of a company or an individual. The security can be fixed, i. e. over specified assets, or in the case of a company, floating as described in the answer to question 1.

Once appointed the administrative receiver has to give notice of the appointment in a number of ways including placing an advert in the most appropriate newspaper and the London Gazette and sending notice of the appointment to all known creditors.

Liquidation (Winding-up)

a) Compulsory

The circumstances in which the court may wind up a company are set out in section 122 of the Insolvency Act 1986, most companies that are wound up are unable to pay their debts as defined by section 123 of that Act.

A copy of the court order must be sent to the Registrar of Companies and the making of the order is advertised in an appropriate newspaper and the London Gazette.

Where an insolvency practitioner is appointed as liquidator in place of the Official Receiver, a copy of the certificate of appointment must be filed with the court. Once appointed the liquidator has to give notice of the appointment in a number of ways, dependant on the method of appointment, including placing an advert in the most appropriate newspaper and the London Gazette and sending notice of the appointment to the Registrar of Companies and all known creditors.

b) Voluntary

The circumstances under which a company may be wound up voluntarily are set out in section 84 of the Insolvency Act 1986.

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c) Creditor’s

For a creditor’s voluntary liquidation the company will decide by extraordinary resolution that it cannot continue its business because of its liabilities and that it is advisable that it be wound up.

Within 14 days of the resolution the company must publicise details by advertising in the London Gazette.

The company has to call a creditor’s meeting to be held within 14 days of the date of the resolution to consider the appointment of the liquidator.

Once appointed the liquidator has to give notice of the appointment by placing an advert in the most appropriate newspaper and the London Gazette and by sending notice to the Registrar of Companies.

d) Member’s

The difference between a creditor’s and a member’s voluntary liquidation is that in a member’s voluntary liquidation the company must be solvent.

Within 14 days of the resolution the company must publicise details by advertising in the London Gazette.

Once appointed the liquidator has to give notice of the appointment by placing an advert in the most appropriate newspaper and the London Gazette, by sending notice to the Registrar of Companies and to all known creditors.

Personal Insolvency Procedures

Bankruptcy

The court may make an individual bankrupt if that person is unable to pay his/her debts.

Notice of the bankruptcy order is sent to the Chief Land Registrar and advertised in an appropriate newspaper and the London Gazette.

Where an insolvency practitioner is appointed as trustee in place of the Official Receiver, a copy of the certificate of appointment must be filed with the court. Once appointed the trustee has to give notice of the appointment in a number of ways, dependant on the method of appointment, including placing an advert in the most appropriate newspaper and sending notice of the appointment to all known creditors.

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3. What is the role of the various participants in each type of proceedings?

The Court

The role and function of the court depends on the type of proceedings:

Administration

This is a court based procedure where the administrator is an officer of the court and they can see directions of the court. The administrator’s actions can be scrutinised by the court and creditors can apply to the court if they believe that the administrator is acting, or intends to act, in a way that unfairly harms the creditors’ interests.

Administrative Receivership

This is not a court based process.

Liquidation (Winding-up)

Compulsory

This is a court based procedure where a company is placed into compulsory liquidation by court order. The liquidator can apply to the court for directions.

Voluntary

This is not a court based procedure, but applications can be made to the court to replace the liquidator or where there are matters of dispute.

Personal Insolvency Procedures

Bankruptcy

This is a court based procedure where an individual is made bankrupt by court order. The trustee can apply to the court for directions.

Insolvency Practitioners

In order to act as an office holder in any insolvency procedure an individual must be an insolvency practitioner authorised by the Secretary of State or by one of seven Recognised Professional Bodies.

The powers of the office holder in administrations, liquidations and bankruptcies are set out in the Insolvency Act 1986, in addition insolvency practitioners also have to act in accordance with best practice and ethical guidelines.

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The powers of the administrative receiver are primarily set out in the relevant security documentation.

Creditors

In administrations, liquidations and bankruptcies the interests of all creditors have to be taken into account. In administrative receiverships the office holder’s duty is principally to act in the interest of the appointing charge holder.

Directors

In all forms of insolvency proceedings the directors have a statutory duty to co-operate with and provide information to the relevant office holder and, in compulsory liquidations, to the official receiver.

Bankrupts

The bankrupt has a statutory duty to co-operate with and provide information to the official receiver and the trustee.

Appeals

Appeals in insolvency proceedings are provide for in Rules 7. 47 to 7. 50 of the Insolvency Rules 1986. Although Rule 7. 47 refers to winding up, the courts have held that the rule also covers administrations.

4. What are the effects of the opening of proceedings?

Assets are anything that that belongs to the company or the debtor that may be used to pay their debts.

Corporate Insolvency

The ownership of the assets remains with the company after it enters the insolvency procedure.

Personal Insolvency

The ownership of the bankrupt’s assets is automatically transferred to the trustee.

Claims

The categories of claims that a creditor may have are as follows:

  • Secured, either by a fixed or floating charge (in companies) ;
  • Preferential, from 15 September 2003 these relate principally to monies owed to employees; and
  • Unsecured.

Moratorium etc.

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When a company enters, or proposes to enter, administration a moratorium comes into effect that, amongst other effects, prevents creditors form taking action against the company.

When a winding-up order is made against a company no action or proceeding can be proceeded with or commenced against the company or its assets unless the court allows it.

When a bankruptcy order has been made or a petition has been presented, the court can stop any legal action against that individual.

Articles 21 and 22 of Council Regulation (EC) No 1346/2000

No specific legislation has been enacted in England and Wales to provide for these Articles. However, where a liquidator makes such requests the ordinary procedures in the Insolvency Act 1986 and Insolvency Rules should be followed.

5. What are the specific rules related to certain categories of claims?

Rights in Rem

Holders of fixed security over the assets of a company or an individual have the right to any proceeds of those assets ahead of other creditors.

Set-Off

The insolvency legislation deals with set-off where there are mutual dealings between third parties and a company or an individual prior to administration, liquidation or bankruptcy.

Reservation of Title

Creditors who have supplied goods under a contract with a reservation of title clause have the right, in certain circumstances, to recover their goods from the insolvency office holder.

Contracts of Employment

The effect of insolvency proceedings on employees depends on the type of proceeding. For example in administrations and administrative receiverships the office holder has 14 days to decide whether to retain all or any of the employees. By contrast in a compulsory liquidation the employees contracts of employment are automatically determined when the court makes the order.

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Debts due to employees are preferential and paid in priority to floating charge holders and ordinary unsecured creditors.

Priority of Creditors

Generally speaking creditors are paid in the following priority:

Fixed charge holders;

Preferential creditors, from 15 September 2003 these relate principally to monies owed to employees;

Floating charge holders; and

Unsecured creditors.

6. What are the rules relating to detrimental acts?

There are a number of provisions which apply to administrations, liquidations and bankruptcies by which the office holder can apply to court to seek to claw back money for the benefit of creditors. The principal provisions are:

Transactions at an undervalue

Administrations and Liquidations

If the office holder has evidence that any assets of the company were transferred for no consideration or at a price which was significantly less than their value, then application can be made to a court for an order restoring the position to what it would have been if the transaction in question had not taken place.

To be caught by this provision the transaction must have taken place within two years of the relevant date, which is the commencement of the liquidation or the date that an administration application, or a notice of intention to appoint, was filed with the court; or if no such notice of intention to appoint was filed, the date the company entered administration.

Transactions in the interim period between filing documents at court and the company entering administration or being would up are also caught.

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Bankruptcies

If the office holder has evidence that any assets of the company were transferred under the following circumstances: for no consideration, at a price which was significantly less than their value, or in consideration of marriage, then application can be made to a court for an order restoring the position to what it would have been if the transaction in question had not taken place.

To be caught by this provision the transaction must have taken place within five years of the date of the petition on which the bankruptcy order was made.

Preferences

Administrations and Liquidations

If the office holder has evidence that a third party, a creditor or guarantor of a debt, has been put in a better position than would have been the case had the transaction not taken place, then application can be made to court for an order restoring the position to what it would have been if the company had not given that preference.

To be caught by this provision the preference must have taken place, in the case of a connected person, within two years of the relevant date, which is the commencement of the liquidation or the date that an administration application, or a notice of intention to appoint, was filed with the court; or if no such notice of intention to appoint was filed, the date the company entered administration. In any other case the relevant period is six months.

Transactions in the interim period between filing documents at court and the company entering administration or being would up are also caught.

Bankruptcies

If the trustee has evidence that a third party, a creditor or guarantor of a debt, has been put in a better position than would have been the case had the transaction not taken place, then application can be made to court for an order restoring the position to what it would have been if the individual had not given that preference.

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To be caught by this provision the preference must have taken place, in the case of an associated person, within two years of the date of the petition on which the bankruptcy order was made. In any other case the relevant period is six months.

7. What are the conditions for the lodgement and admission of claims?

All insolvency office holders are required to provide information to unsecured creditors, details of their reporting duties are set out in the Insolvency Act 1986 and the Insolvency Rules 1986.

There are no distributions to unsecured creditors in administrative receiverships and there are accordingly, no rules regarding the proving of their claims.

In all other insolvency proceedings, corporate and individual, there are broadly similar rules for lodging claims with the office holder, the relevant provisions are set out in the Insolvency Rules 1986. The rules also set out the provisions relating to the admission of those claims by the office holder.

Within the preferential and unsecured creditor classes all creditors rank equally within their class and share in the available assets in proportion to the amount that they are owed.

If a company has more than one creditor secured by a floating charge they are paid in order of priority, which is either determined by the date the charge was created or in the order set out in a priority agreement.

8. What are the rules relating to reorganisation proceedings?

Companies

Viable companies that get into financial difficulties can seek rescue through administration or a company voluntary arrangement (“CVA”). Many company rescues that flow out of an administration are done through a CVA. In order to obtain a CVA at least 75% of the creditors have to approve the proposals put forward by the directors, or if the company is in administration, the administrator. Once approved the arrangement is binding on all creditors who received notice of the proposals.

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The provisions relating to CVAs and administrations are set out in Parts I and II of the Insolvency Act 1986 and Parts 1 and 2 of the Insolvency Rules 1986, respectively.

Individuals

Individuals that are in financial difficulties can avoid bankruptcy by entering into an individual voluntary arrangement (“IVA”). In order to obtain an IVA at least 75% of the creditors have to approve the proposals put forward by the debtor. Once approved the arrangement is binding on all creditors who received notice of the proposals.

The provisions relating to IVAs are set out in Part VIII of the Insolvency Act 1986 and Part 5 of the Insolvency Rules 1986.

9. What are the rules relating to the winding-up proceeding?

The provisions relating to winding-up proceedings are set out in Part IV of the Insolvency Act 1986 and Part 4 of the Insolvency Rules 1986. The provision empowering a liquidator to sell the company’s assets is set out in paragraph 6 of schedule 4 to the Insolvency Act 1986. The provisions relating to distributions to creditors are set out in chapter 14 of Part 4 and Part 11 of the Insolvency Rules 1986.

10. What are the conditions for the closure of the proceeding?

The provisions relating to the ending of administrations, liquidations and bankruptcies are set out in the Insolvency Act 1986 and the Insolvency Rules 1986.

The conditions relating to the ending of an administrative receivership will be regulated by the security documentation.

Stigma of Failure

The Enterprise Act 2002 seeks to reduce the stigma of failure and encourage rescue.

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The Government recognises that financial failure is not automatically the fault of the debtor. The aim of the Act is to ensure that each bankrupt is looked at on his/her own merits and to get away from a “one size fits all” approach. The period of bankruptcy has been reduced from typically three years to a maximum of one year. To balance this a new regime of Bankruptcy Restrictions Orders has been introduced as a result of which those individuals that are culpable or reckless will be subject to bankruptcy restrictions for between two and fifteen years. These provisions will come into force on 1 April 2004.

In companies the Enterprise Act has made changes to the administration process to make it faster, fairer and focussed on rescue. The aim is to encourage more viable companies that get into financial difficulties to seek help at an earlier point when they are more likely to be rescued rather than wound up. These provisions came into force on 15 September 2003.

Sanctions

There are civil and criminal sanctions which can be levied against directors who abuse the privilege of limited liability

Civil

Where a company enters administration or administrative receivership or goes into liquidation, if a director has acted in a way that makes him unfit to be a director then he can be disqualified from acting as a director or being involved in the management of a company for a period between two and fifteen years.

In liquidations a director can also be ordered by the court to contribute to the company’s assets if the court is satisfied that the director has caused the company to continue trading to the detriment of creditors after he/she knew that the company was insolvent.

Criminal

There are a number of specific offences set out in the Insolvency Act 1986 for companies in liquidation for which a director can be prosecuted. In addition it is possible to prosecute directors for company law offences and any other criminal matter that may be evidenced, for example Theft Act offences.

Further information

Insolvency Service - www.insolvency.gov.uk

« Bankruptcy - General information | United Kingdom - General information »

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Last update: 29-09-2006

 
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