Restructuring and Insolvency in United Kingdom (UK) 2024

Restructuring and Insolvency in United Kingdom (UK) 2024 – The Supreme Court

RESTRUCTURING AND INSOLVENCY 2024

UNITED KINGDOM – ENGLAND & WALES

Katharina Crinson, Catherine Balmond

(Freshfields Bruckhaus Deringer)

GENERAL

Legislation

1. What main legislation is applicable to insolvencies and reorganizations?

The legislation principally applicable to the insolvency of companies incorporated in England and Wales is the Insolvency Act 1986, as amended (the Insolvency Act). The Insolvency Act is supplemented by subordinate legislation, the most important of which is the Insolvency (England and Wales) Rules 2016. The Company Directors Disqualification Act 1986 deals with the position of directors of insolvent companies.

Reorganization

In relation to reorganizations, the Companies Act 2006 is relevant, setting out the provisions concerning schemes of arrangement and restructuring plans.

Excluded entities and excluded assets

2. What entities are excluded from customary insolvency or reorganization proceedings and what legislation applies to them? What assets are excluded or exempt from claims of creditors?

Partnerships

The insolvency of partnerships (other than limited liability partnerships) is dealt with by the Insolvent Partnerships Order 1994, as amended. Limited liability partnerships are subject to the Insolvency Act and related subordinate legislation subject to exceptions.

Special regimes

There are special insolvency proceedings in respect of companies belonging to certain key industries (eg, utilities). The aim of the special regimes is to ensure the continuity of service and the orderly wind-down and handover of service provision where the services form an essential part of the country’s infrastructure or are systemically important.

Legislation also exists that is designed to protect the financial markets (including insurance companies) from the insolvency of a market participant. This is a highly complex and deeply regulated area.

Excluded assets

All property in which the company has a beneficial interest will fall within the insolvent estate and be available for the benefit of creditors. Assets subject to a fixed charge, supplied under hire purchase agreements, subject to retention of title claims or that the company holds on trust for a third party are not beneficially owned by the company and therefore do not fall within the insolvent estate.

Public enterprises

3. What procedures are followed in the insolvency of a government-owned enterprise? What remedies do creditors of insolvent public enterprises have?

There are no specific rules for government-owned enterprises and the normal rules on insolvency applicable to the type of company involved apply. There are special insolvency proceedings regarding companies belonging to key industries and these special insolvency proceedings will often provide for the government or a particular department or agency to be involved in the process. Creditor remedies are also as provided in the respective insolvency proceeding.

Protection for large financial institutions

4. Has your country enacted legislation to deal with the financial difficulties of institutions that are considered ‘too big to fail’?

Yes. The Banking Act 2009, as amended (the Banking Act), governs the rescue or wind-down of banks and other financial institutions. The Banking Act establishes a permanent special resolution regime providing the Treasury, the Bank of England and the appropriate regulator with tools to deal with banks that get into financial difficulties.

The special resolution regime provides for five pre-insolvency stabilization options:

• transfer to a private sector purchaser;
• transfer to a bridge bank;
• transfer to an asset management vehicle;
• bail-in; and
• transfer to temporary public sector ownership.

A code of practice is in force giving guidance on the use of the special resolution tools.

There are two insolvency options:

• bank insolvency; and
• bank administration.

The aim of bank insolvency is to provide for the orderly winding up of a failed bank or financial institution. The provisions are based on existing liquidation provisions. The aim of bank administration is to deal with the residual part of a bank or financial institution where there has been a partial transfer of business to a private-sector purchaser or bridge bank pursuant to the special resolution provisions. A bank administrator may be appointed by the court to administer the affairs of the residual part of the insolvent bank.

The Banking Act excludes investment banks from the bank insolvency and administration procedures where the investment bank is not an authorized deposit-taking institution. This situation is governed by the Investment Bank Special Administration Regulations 2011, as amended (SI 2011/245) (the Regulations). Where the investment bank is also a deposit-taking bank with eligible depositors, the Regulations allow the bank to be put into special administration (bank insolvency) or special administration (bank administration).

Courts and appeals

5. What courts are involved? What are the rights of appeal from court orders? Does an appellant have an automatic right of appeal or must it obtain permission? Is there a requirement to post security to proceed with an appeal?

The High Court has jurisdiction to wind up companies. Any criminal matters must be dealt with by the relevant criminal court.

Appeals in insolvency proceedings follow the ordinary course for appeals. Appeals of decisions made by a High Court judge will go to the Civil Division of the Court of Appeal. A decision of the Court of Appeal can be appealed to the Supreme Court, the highest court in the United Kingdom. There is no general obligation to post security to proceed with an appeal unless a party specifically applies for the court to order security for costs.

TYPES OF LIQUIDATION AND REORGANIZATION PROCESSES

Voluntary liquidations

6. What are the requirements for a debtor commencing a voluntary liquidation case and what are the effects?

There are two procedures for the voluntary liquidation of a company:

• members’ voluntary liquidation (MVL) (a solvent liquidation); and
• creditors’ voluntary liquidation (CVL) (typically, but not necessarily, an insolvent liquidation).

Members’ voluntary liquidation

If the directors can swear a statutory declaration that the company is solvent, a company can be placed into MVL. The MVL is commenced once the shareholders pass a special resolution (75 percent majority) to place the company into liquidation. The shareholders choose the identity of the liquidator and they are appointed by ordinary resolution (above 50 percent). If the liquidator subsequently determines that the company is, in fact, insolvent, then the MVL should be converted into a creditors’ voluntary liquidation.

Creditors’ voluntary liquidation

If the company is insolvent, or the directors are unable to swear a statutory declaration as to solvency, a company can be placed into a CVL. Like an MVL, the process is started by the shareholders passing a special resolution (75 percent) resolving to place the company into liquidation.

The shareholders will also appoint a liquidator, but until the creditors decide on a liquidator, the powers of the shareholder-appointed liquidator are limited. The directors must seek a decision from the creditors within 14 days. If the creditors’ choice of liquidator differs from that of the shareholders, the creditors’ choice will prevail.

Both types of voluntary liquidation

On the liquidator’s appointment, the directors’ powers will cease. There is no automatic moratorium on proceedings against the company in a voluntary liquidation. The liquidator or any creditor or shareholder may, however, apply to the court for a stay on any proceedings.

Voluntary reorganizations

7. What are the requirements for a debtor commencing a voluntary reorganization and what are the effects?

There are four main processes set out by legislation that a debtor can use to commence a voluntary reorganization. These are:

• company voluntary arrangements (CVAs);
• schemes of arrangement;
• restructuring plans; and
• to a lesser degree, administrations.

Company voluntary arrangements

The process for a CVA is set out in Part 1 of the Insolvency Act 1986 (the Insolvency Act). A CVA is an agreement between a company, its shareholders and its (unsecured) creditors where the directors (or a liquidator or administrator) propose a reorganization plan, which usually involves delayed or reduced debt payments.

The CVA commences with the directors of the company making a written proposal to an insolvency practitioner (called the nominee) who files a report with the court on whether to call meetings of the shareholders and seek a decision by the creditors. While the nominee’s report is filed at court, there is no court hearing or judicial examination.

If the nominee recommends that the creditors and members should consider the proposal, a meeting of the company’s shareholders is called and creditors are asked to approve the proposal by way of a decision procedure (various types of decision procedures are available, such as virtual meeting, electronic voting or correspondence). A physical creditors’ meeting only takes place by exception (and must be specifically requisitioned). Shareholders must approve the proposal by above 50 percent.

Creditors must approve by 75 percent (in value) of those who respond to the decision procedure. Also, a resolution will be invalid if more than half of the total value of ‘unconnected’ creditors vote against it. The definition of ‘connected’ is set out in the Insolvency Act and is very broad, most importantly including the company’s shareholders.

Where the requisite approvals have been obtained, the CVA will bind every creditor who was entitled to vote in the decision procedure except for preferential and secured creditors, who are not bound by the CVA unless they agree to be. Where the meeting of shareholders and the creditors’ decision produce conflicting conclusions, the creditors’ decision prevails. However, in this case, a shareholder can within 28 days apply to the court for an order reversing or modifying the creditors’ decision.

Creditors may also apply to court to challenge the CVA within 28 days of the approval being reported to court if they think that they have been unfairly prejudiced or there has been a material irregularity in the conduct of the decision process. Once the CVA has been approved, the nominee becomes the supervisor and is tasked with ensuring that the terms of the CVA are implemented.

During the CVA process, there is no statutory moratorium. However, it may be possible to use the stand-alone moratorium tool in the lead-up to the CVA. CVAs are often used in the context of implementing an operational restructuring of a business (as opposed to a financial restructuring) – not least because of the inability to bind secured creditors in this process. It is possible to combine a CVA with a scheme of arrangement or restructuring plan or administration or combination.

Schemes of arrangement

Schemes of arrangement are governed by Part 26 of the Companies Act 2006. A scheme provides a mechanism enabling a company to enter into a compromise or arrangement with its creditors (including secured creditors). The process is commenced by a court application (ordinarily by the company, but this could also be made by any creditor, liquidator or administrator) for an order that a creditors’ meeting be summoned.

The scheme is approved if 75 percent in value and the majority in number of each class of creditors present and voting votes in favor. A second court application is then required at which the court is asked to sanction the scheme. Once sanctioned and delivered to Companies House, the scheme will be binding on all the company’s creditors who are affected by the scheme (regardless of whether they voted in favor, against or abstained).

A company can implement a scheme if it is capable of being wound up in England and Wales. Case law has clarified that a company can be wound up in England and Wales if it has ‘sufficient connection’ with England and Wales. The question as to what constitutes ‘sufficient connection’ is a factual one, but case law has continually reduced the threshold. A foreign company with either its center of main interests (COMI) or an establishment in England has sufficient connection with England.

Equally, there are a number of cases where sufficient connection was demonstrated because the finance documents were governed by English law and contained a clause granting (exclusive and non-exclusive) jurisdiction in favor of the English courts. The English courts have taken an expansive view of sufficient connection (even where this is established late and for the purpose of the scheme). Companies will need to take care, however, to ensure that an English law scheme is capable of being enforced in the jurisdiction in which the company’s assets are situated.

An English law decision is of limited value if creditors are still able to take unilateral action to recover their ‘schemed’ debts in overseas jurisdictions. Generally, the English courts will require expert evidence that the scheme is likely to have substantial effect and would be capable of being enforced in relevant jurisdictions. The scheme does not provide a statutory moratorium.

Schemes have been used to effect a ‘balance sheet restructuring’.

Restructuring plan

Restructuring plans are governed by Part 26A of the Companies Act 2006, having been introduced by the Corporate Insolvency and Governance Act 2020. The restructuring plan is modeled on the scheme of arrangement and requires a similar process for commencement and approval. The process is commenced by way of court application for an order to convene class meetings to consider the proposed plan.

The company must have encountered, or be likely to encounter, financial difficulties that are affecting, or will or may affect, its ability to carry on business as a going concern. A compromise or arrangement must be proposed between the company and its creditors or members (or any class thereof), the purpose of which must be to eliminate, reduce or prevent, or mitigate the effect of, any of the financial difficulties affecting the company.

The plan will be approved if 75 percent in value of the creditors or class of creditors or members or class of members (as the case may be) present and voting either in person or by proxy vote in favor. Unlike a scheme of arrangement, a restructuring plan can be sanctioned by the court even where not every class has voted in favor of the plan by the statutory majority.

Upon meeting the requisite voting threshold to approve the plan, a second court application is then made to request that the court sanction the plan. As is the case with a scheme of arrangement, once the plan has been sanctioned and delivered to Companies House, the plan will be binding on the company and on creditors or class of creditors or members or class of members (as the case may be), regardless of whether they voted in favor, against or abstained. Again, as with a scheme, there is no statutory moratorium for a restructuring plan.

As in the case of a scheme, a restructuring plan can be proposed by or in respect of any company that is liable to be wound up under the Insolvency Act, thereby incorporating the ‘sufficient connection’ test mentioned earlier. Also, as with schemes, the English court will require expert evidence that the plan would be capable of being enforced in relevant jurisdictions before sanctioning the plan.

Administration

Administration is an insolvency procedure that allows a (normally insolvent) company to continue to trade with protection from its creditors by way of a moratorium. This may give the company sufficient breathing space to be reorganized and refinanced.

While a company is in administration it is controlled by an administrator, who is a licensed insolvency practitioner, and to all effects and purposes the directors’ powers will cease (although they will remain in office). There is both a court-based procedure (via an administration application) and an out-of-court route (for use by a holder of a qualifying floating charge or by the company or its directors) to place a company in administration.

The objectives of an administration are to be achieved via a waterfall effect. The primary objective is to rescue the company as a going concern, and only if the administrator thinks that this objective is not reasonably practicable, or that a better result will be achieved for the company’s creditors by some other means, can they consider the second or third objectives:

• achieving a better result for the company’s creditors as a whole than would be likely if the company were wound up; or
• realizing property to make a distribution to one or more secured or preferential creditors.

An administration may last one year only (unless it is renewed with the consent of the creditors for one year, once, or with the consent of the court for an unlimited period). The administrator can collect in and distribute the company’s assets.

Successful reorganizations

8. How are creditors classified for purposes of a reorganization plan and how is the plan approved? Can a reorganization plan release non-debtor parties from liability and, if so, in what circumstances?

There are no mandatory features in an informal reorganization; it is a matter for agreement between the creditors.

Scheme of arrangement

In a scheme, there are also no mandatory features. However, the scheme will need to be better than its alternative (most commonly an insolvency filing but a solvent comparator is also possible). An explanatory statement must explain the effect of the compromise or arrangement and state any material interest of the directors and the effect of that interest on the compromise or arrangement. Other information that will be relevant to creditors to enable them to make an informed decision as to whether the scheme is in their interests and on how to vote should also be included.

The process is commenced by a court application for an order that a meeting of creditors be summoned. There are separate creditors’ meetings for each class of creditors. It is the responsibility of the party proposing the scheme to determine the correct classes. If incorrect class meetings are held, then the court will have no jurisdiction to sanction the scheme.

The classic test for determining the constitution of classes is that a class should comprise ‘those persons whose rights are not so dissimilar as to make it impossible for them to consult together with a view to their common interest’. The test for who forms a class is determined in accordance with the creditors’ rights under the scheme, as opposed to broader collateral interests.

Whether a group of creditors form a single class depends on the analysis of the rights that are to be released or varied under the scheme and any rights that the scheme gives, by way of compromise or arrangement, to those whose rights are to be released or varied.

In many cases, it is not possible to be certain that a particular type of claim constitutes a class of creditors. However, in certain cases the distinction is relatively clear-cut; for example, secured creditors and unsecured creditors will almost certainly constitute separate classes. When an insolvent company proposes a scheme, the court will look at the ‘insolvency comparator’ (ie, the rights that the creditors would have against the company in an insolvent liquidation).

The rights of creditors under a scheme can differ from the rights a creditor would have if the company went into insolvent liquidation; indeed, the purpose of many schemes is to produce an arrangement that differs from an insolvent liquidation.

However, depending on the differences, this may have an impact on the analysis of which creditors form a separate class for the purposes of the scheme meeting and whether the scheme is fair and should be sanctioned. If the differences apply equally to all creditors, no question of separate classes arises. If the differences produce a result that affects one group of creditors differently from another, then, subject to questions of materiality, they should form separate classes.

For any proposed compromise or arrangement put forward under a scheme to become binding on creditors, it must be approved by 75 percent in value and the majority in number of each class of creditors present and voting, and then sanctioned by the court. The scheme will not be sanctioned unless it is fair – that is, a scheme that an intelligent and honest person, a member of the class concerned and acting in respect of their interest might reasonably approve.

A scheme of arrangement can release non-debtor parties. The extent to which a scheme is capable of affecting third-party obligations depends on the extent to which those obligations can be treated as closely connected or ancillary to the company’s own obligations and whether those obligations are personal only and not proprietary. The court has confirmed that, in the case of an English scheme of arrangement, guarantors that are themselves not bound by the scheme of arrangement can have their guarantees released under the terms of the scheme.

Restructuring plan

There are also no mandatory features of the restructuring plan. Similar to a scheme of arrangement, the process is commenced by a court application for an order that class meetings be convened to consider the proposed plan. There will be a separate meeting for each class of creditors, the composition of which is to be determined by the party proposing the restructuring plan.

The court will examine the classes of creditors and members proposed at the convening hearing. The same approach to classifying creditors as is applicable to a scheme under Part 26 of the Companies Act 2006 applies to a restructuring plan, namely a class should comprise ‘those persons whose rights are not so dissimilar as to make it impossible for them to consult together with a view to their common interest’.

For any proposed compromise or arrangement to become binding on creditors, it must be voted on and then sanctioned by the court. The court may refuse to sanction the restructuring plan if it is not ‘just and equitable’.

The significant difference between a scheme of arrangement and a restructuring plan is that the party proposing the restructuring plan can apply to the court for sanction of the plan in circumstances where the plan is not agreed by 75 percent in value of a class or classes, provided that two conditions are met:

• Condition A: the court is satisfied that none of the members of the dissenting class would be worse off than in the scenario that (in the court’s view) is the most likely scenario if the compromise or arrangement is not sanctioned (that scenario being the relevant alternative); and
• Condition B: the compromise or arrangement has been agreed by a class who would receive a payment or have a genuine economic interest in the company in the event of the relevant alternative.

The relevant alternative is that ‘most likely’ to occur if the restructuring plan is not sanctioned; it is not necessary to establish that it would definitely occur or even that it is more likely than not to occur.

There is no requirement that a class of creditors that would receive more than another class in the event of the relevant alternative must also receive more under the proposed compromise or arrangement (ie, there is no absolute priority rule). What is required is that, on the balance of probabilities, the dissenting class is not worse off under the plan than in the relevant alternative.

However, it is important to recognize that in the recent decision of Re AGPS Bondco plc [2024] EWCA Civ 24 (Adler) the court expressed its provisional view that there is no jurisdiction under Part 26A to ‘zero’ creditors or members’ rights for no consideration.

The person proposing the plan may also be able to exclude a particular class of creditors or members from voting if they can show, to the satisfaction of the court, that none of the members of the class has a genuine economic interest in the company. To date, this power has only been used twice where, on both occasions, the court excluded all but one creditor class from voting.

Like in a scheme of arrangement, the court has discretion to sanction the plan. Where not all classes have voted in favor of the plan, the cross-class cramdown conditions mentioned earlier need to have been met. The court has stated (in Virgin Active ([2021] EWHC 1246 (Ch)) that the dissenting vote of out-of-the-money creditor classes should not weigh heavily or at all in the sanction decision, noting that the legislation allows for these creditors to be bound to a plan that compromises their claims without even being given the opportunity to vote at a class meeting.

Furthermore, while the satisfaction of Conditions A and B above is the gateway to possible sanction, it does not create a presumption in favor of it. Following the decision in Re AGPS Bondco plc [2024] EWCA Civ 24 (Adler) it has been confirmed that the court will be rigorous in ensuring that dissenting creditors are treated fairly in cases where the court is considering exercising its discretion to impose a plan on a dissenting class of creditor.

The court will also examine whether a different allocation of the ‘restructuring surplus’ (ie, the value or potential future benefits that use of such business and assets might generate following the restructuring) would have been possible and whether that alternative allocation would have been fairer.

It was made clear in Re AGPS Bondco plc [2024] EWCA Civ 24 (Adler)) that the court will consider the ‘horizontal comparator’ test, which involves assessing whether any differences in the treatment of different creditor groups are justified and appropriate in the circumstances. In particular, the court will bear in mind the following:

• the existing rights of the different classes of creditors and how they would be treated relative to each other in the relevant alternative;
• whether the relative treatment of the different classes of creditors under the plan is consistent with the relevant alternative or if there is differential treatment; and
• if there is differential treatment under the restructuring plan as compared to the relevant alternative, whether that differential treatment is for a good reason and justified on a proper basis.

Unlike a CVA, a restructuring plan can compromise the debt owed to preferential creditors. Given that the restructuring plan permits cross-class cramdown when the conditions outlined above are met, it will be possible to cramdown an entire class of preferential creditors where the court is prepared to exercise its discretion to do so – although the court has indicated that it will exercise great caution in doing so (see Re Prezzo Investco Limited ([2023] EWHC 1679 (Ch))).

Company voluntary arrangement

In a CVA there are also no mandatory features (although the legislation sets out the matters that need to be dealt with in the proposal). The CVA proposal must lead to a better outcome for creditors than its alternative (most commonly an administration or liquidation). There are no separate classes of creditors in a CVA, although secured and preferential creditors cannot be compromised without their consent.

Unsecured creditors who are not being compromised can vote in the same class as those that are being compromised. No court sanction is required. A creditor or shareholder can bring a challenge to the CVA in court.

Involuntary liquidations

9. What are the requirements for creditors placing a debtor into involuntary liquidation and what are the effects? Once the proceeding is opened, are there material differences to proceedings opened voluntarily?

Compulsory liquidation

In the case of involuntary liquidation (otherwise known as compulsory liquidation or winding up by the court) the creditor must apply to the court for a winding-up order. The most likely ground for a winding-up order is that the company is unable to pay its debts.

If the court makes a winding-up order, the winding up is (with limited exceptions) deemed to commence at the time of the presentation of the winding-up petition rather than at the date of the order.

The material differences to voluntary liquidation proceedings are:

• any disposition of the company’s property and any transfer of shares made after the commencement of the winding up is, unless the court orders otherwise, void; and
• once the winding-up order has been made, no action may be started or proceeded with against the company without the court’s permission.

Involuntary reorganizations

10. What are the requirements for creditors commencing an involuntary reorganization and what are the effects? Once the proceeding is opened, are there any material differences to proceedings opened voluntarily?

A creditor cannot propose a CVA or a moratorium; these are company prerogatives. A creditor can propose a scheme of arrangement or a restructuring plan. Case law stipulates that the company must consent to the scheme or plan and, in any event, creditors are rarely in the position to propose a scheme or plan (although this happened in the case of the restructuring plan for The Good Box Co Labs Ltd ([2023] EWHC 274 (Ch)).

A creditor may apply for the company to be put into administration and, subsequently, the administrator may propose a CVA, a scheme or a restructuring plan.

Once an administration is underway (or the administrator proposes a scheme, a restructuring plan or a CVA), there are no material differences to proceedings opened voluntarily.

Expedited reorganizations

11. Do procedures exist for expedited reorganizations (eg, ‘prepackaged’ reorganizations)?

There are no express provisions for the expedition of CVAs, schemes or restructuring plans, and the implementation time will depend on the complexity, although the majority of the time spent on a reorganization is in negotiation with the creditors and in preparation of the settlement documentation.

In relation to schemes of arrangement and restructuring plans, the court has been willing to hear applications on an expedited basis (although the court has issued warnings that proper time for consideration needs to be given) and also to convene meetings following comparatively short notice periods where there is an urgent requirement to do so.

If a reorganization is implemented through an administration process, this can be done on a quick timescale using the ‘prepack administration’ tool.

Unsuccessful reorganizations

12. How is a proposed reorganization defeated and what is the effect of a reorganization plan not being approved? What if the debtor fails to perform a plan?

Consensual reorganization

A dissenting creditor can defeat a reorganization that takes place outside of a formal process by refusing to take part or, where appropriate, by applying for the company’s liquidation (although the court must exercise its discretion when making a winding-up order). The consequences of a breach by the debtor of any contractual agreement in a reorganization plan will depend on the terms of the plan but will usually result in the creditor having all its previous rights restored.

Company voluntary arrangement, scheme of arrangement or restructuring plan

A proposed CVA, scheme or restructuring plan can be defeated if it does not get the statutory majority of creditors voting in its favor.

Assuming that the requisite majorities vote in favor, a scheme will be defeated if the court refuses to sanction it either because it does not have the jurisdiction to sanction it, for example, because the classes are incorrectly constituted or because it is unfair. A restructuring plan can be defeated on similar grounds (although the court can sanction a plan even if not all classes have voted in favor of it), except for a focus being placed on whether the plan is just and equitable, rather than fair.

A CVA will be defeated if a creditor, shareholder or contributory brings a successful challenge on the grounds of unfair prejudice or material irregularity. A CVA may also be defeated if there is a mismatch between the decisions taken at the shareholders’ meeting and the creditors’ decision procedure, and a shareholder successfully applies to court to challenge the decision taken by the creditors.

If a scheme, restructuring plan or CVA is defeated, then, unless new restructuring proposals can be agreed with the requisite majorities of creditors, it is likely that the company will be placed in administration or liquidation (or an equivalent insolvency procedure in the jurisdiction where the company is incorporated or has its COMI) – although other outcomes are possible, such as the presentation of a different scheme, plan or CVA.

If there is default by the debtor in performing an approved plan in a scheme or restructuring plan, the consequences will usually be set out in the scheme or restructuring plan. Where there is a material default by the debtor in performing the terms of the CVA, the supervisor of the CVA is likely to issue a certificate of non-compliance setting out the manner in which the company has defaulted and the steps that the supervisor proposes to take. These steps will normally be set out in the CVA.

Corporate procedures

13. Are there corporate procedures for the dissolution of a corporation? How do such processes contrast with bankruptcy proceedings?

In addition to a members’ voluntary liquidation, which is an Insolvency Act procedure for solvent companies, a company may be dissolved under sections 1000 and 1003 of the Companies Act 2006, without the need for a formal liquidation procedure if it is dormant.

Companies that have been dissolved under these sections, as well as companies that have been dissolved following liquidation, may be restored to the Register of Companies on a court application by an interested party within six years of the date of dissolution. A court application may be made at any time for the purpose of bringing proceedings against the company for damages for personal injury.

The court will make an order for restoration if at the time of the dissolution the company was carrying on business or in operation, if (in the case of a voluntary striking off) the company did not comply with the procedural requirements for dissolution or, in other cases, if the court considers it just to do so. A common ground to restore a company is where an asset has become available to the company (eg, a tax refund) that can only be claimed by the company and therefore it will need to be restored.

Conclusion of case

14. How are liquidation and reorganization cases formally concluded?

In the case of a voluntary liquidation, once the company’s affairs are fully wound up the liquidator must send final accounts showing how the liquidation has been conducted to creditors. After the account has been laid, the liquidator will send a copy of the account to Companies House. The company is then deemed to be dissolved at the expiry of three months.

In the case of a compulsory liquidation, if the liquidator is not the official receiver, once the liquidation is complete, the liquidator must prepare a final account and send this to the company’s creditors. The liquidator then sends a copy of the final account to the court and Companies House. The company is deemed to be dissolved three months after Companies House registers this notice.

If the liquidator is the official receiver, the liquidation will end three months after the official receiver notifies Companies House that the liquidation is complete. Alternatively, if the company has insufficient assets to cover the costs of the liquidation and it appears to the official receiver that the affairs of the company do not require any further investigation, the official receiver may apply to Companies House for early dissolution of the company.

There are various exit routes from administration. If the objective of the administration is achieved, the administration must be terminated. However, an administration can also be converted into a creditors’ voluntary liquidation or the company could be dissolved.

CVAs, schemes, restructuring plans and informal reconstructions, if successful, will end in accordance with their terms.

INSOLVENCY TESTS AND FILING REQUIREMENTS

Conditions for insolvency

15. What is the test to determine if a debtor is insolvent?

‘Insolvency’ itself is not defined by the Insolvency Act 1986 (the Insolvency Act). Instead, the Act contains the concept of a company being ‘unable to pay its debts’. The Insolvency Act deems a company to be unable to pay its debts if:

• it has not paid a claim for a sum due to a creditor exceeding £750 within three weeks of service with a written demand (known as a statutory demand);
• an execution or judgment against the company is unsatisfied;
• it is proved to the satisfaction of the court that it is unable to pay its debts as they fall due, also having regard to contingent and prospective liabilities (generally known as ‘cash flow insolvency’); or
• if it is proved to the satisfaction of the court that the value of the company’s assets is less than the amount of its liabilities, taking into account contingent and prospective liabilities (commonly known as the ‘balance sheet test’). Case law has held that while the court will pay due regard to the company’s statutory accounts, the court is required to make an assessment of the company’s assets and liabilities and decide whether, on the balance of probabilities (making proper allowance for contingent and prospective liabilities), the company cannot reasonably be expected to meet those liabilities.

Mandatory filing

16. Must companies commence insolvency proceedings in particular circumstances?

No. There is no express duty to commence insolvency proceedings at any particular time on the grounds of either cash-flow or balance-sheet insolvency, although directors may commence proceedings to try to minimize the risk of personal liability for wrongful trading.

Under section 214 of the Insolvency Act, a liquidator or an administrator (or an assignee of such) can bring an action against directors, former directors and ‘shadow directors’ for wrongful trading. A director may be held liable where they continue to trade after a time when they knew, or ought to have concluded, that there was no reasonable prospect of the company avoiding insolvent liquidation or administration.

To avoid liability, once there is no reasonable prospect that a company can avoid going into insolvent liquidation or administration, directors must take every step to minimize potential loss to creditors. This may involve filing for an insolvency procedure.

DIRECTORS AND OFFICERS

Directors’ liability – failure to commence proceedings and trading while insolvent

17. If proceedings are not commenced, what liability can result for directors and officers? What are the consequences for directors and officers if a company carries on business while insolvent?

A consequence of carrying on business when insolvent can be that the court finds a director guilty of wrongful trading under section 214 of Insolvency Act 1986 (the Insolvency Act) where the other requirements for that offence are met. The court may declare that person liable to make such contribution to the company’s assets as the court thinks proper, the amount being compensatory rather than penal.

A further consequence of carrying on business when insolvent can be that the court finds a director guilty of fraudulent trading under section 213 of the Insolvency Act. Where it appears that any business of the company has been carried on with intent to defraud creditors or for any fraudulent purpose, the court may declare that any persons who were knowingly parties to the carrying on of business in that manner are liable to contribute to the company’s assets.

This section goes beyond directors and officers and applies to anyone who has been involved in carrying on the business of the company in a fraudulent manner. Actual dishonesty must be proved. Both a liquidator and an administrator (or an assignee of such) can bring this action. Finally, a director could be disqualified under the Company Directors Disqualification Act 1986 (the CDDA).

Directors’ liability – other sources of liability

18. Apart from failure to file for proceedings, are corporate officers and directors personally liable for their corporation’s obligations? Are they liable for corporate pre-insolvency or pre-reorganization actions? Can they be subject to sanctions for other reasons?

The company’s officers and directors will not generally be personally liable for obligations of their corporations unless they have entered into personal guarantees. However, the company’s officers can be held personally liable to contribute to the company’s assets for any one of the following reasons:

• misfeasance or breach of any fiduciary or other duty;
• wrongful trading; and
• fraudulent trading.

The company’s officers can also be criminally liable under sections 206 to 211 of the Insolvency Act for fraud, misconduct, falsification of the company’s books, material omissions from statements and false representations. They are also liable to disqualification from being a director of any company for up to 15 years under the CDDA. The court can also make a compensation order where a director has been disqualified.

A director can also be disqualified in the United Kingdom if they have been convicted of (among others) an offence in connection with the promotion, formation, management, liquidation or striking off of a company outside the United Kingdom. Finally, environmental and health and safety legislation may provide for personal liability on directors and officers.

Directors’ liability – defenses

19. What defenses are available to directors and officers in the context of an insolvency or reorganization?

In relation to wrongful trading, assuming that the necessary limbs of the statute are met (ie, the director at the time knew or ought to have concluded that there was no reasonable prospect of the company avoiding insolvent liquidation or insolvent administration), then there is a defense available to the director if they have taken every step to minimize the potential loss to the company’s creditors as they ought to have taken.

Resignation is not generally considered a defense to directors – indeed, resigning may be viewed by the court as an insufficient step to minimize the potential loss to creditors (and therefore negate the possible defense).

In relation to a misfeasance claim under section 212 of the Insolvency Act, the Companies Act (section 1157) provides for relief from liability for directors if they have acted honestly and reasonably and if it is fair in the circumstances to excuse the person from liability.

Shift in directors’ duties

20. Do the duties that directors owe to the corporation shift to the creditors when an insolvency or reorganization proceeding is likely? When?

The Supreme Court examined the shift in directors’ duties in the case of BTI 2014 LLC v Sequana SA [2022] UKSC 25 and held that directors must consider the interests of creditors, balancing them against the interests of shareholders where they may conflict, when they know, or ought to know, that:

• the company is bordering on insolvency, meaning that a state of insolvency is both imminent and inevitable;
• the company is in a state of actual insolvency; or
• there is a probability of entering into an insolvent liquidation or administration.

It is, in effect, a sliding scale – the greater the company’s financial difficulties, the more the directors should prioritize the interests of creditors as a whole where their interests conflict with those of the shareholders. Where an insolvent liquidation or administration is inevitable, creditors’ interests become paramount.

The Insolvency Act underscores this shift by exposing directors to the possibility of personal liability for wrongful trading. The Companies Act 2006 also recognizes this shift (in section 172(3) of the Companies Act 2006). Directors must consider the interests of creditors as a whole, and not just the interests of any individual creditor or class of creditors. A director is subject to these duties irrespective of whether they are an executive or non-executive director and even if appointed as a nominee of a particular creditor or shareholder.

Directors’ powers after proceedings commence

21. What powers can directors and officers exercise after liquidation or reorganization proceedings are commenced by, or against, their corporation?

In a reorganization outside a formal insolvency process, the directors retain their management powers and will be tasked with driving the restructuring.

In a scheme of arrangement or a restructuring plan, directors remain in control of the management of the business.

In a moratorium, the directors retain control of the company, although a licensed insolvency practitioner (the monitor) will be appointed with certain oversight duties. Directors will need to seek permission from the monitor to engage in certain acts such as disposing of property (unless disposed of in the ordinary course of business or in pursuance of a court order), granting security or paying certain pre-moratorium debts for which a payment holiday applies (this permission is only required if the total payments to a person exceed the greater of £5,000 or 1 percent of the value of the debts and other liabilities owed by the company to its unsecured creditors when the moratorium begins).

In a company voluntary arrangement (CVA), the directors remain in control with the assistance and supervision of the nominee and supervisor of the CVA.

In a liquidation, the directors’ powers will cease unless (for a voluntary liquidation) the creditors’ committee and the creditors (in a creditors’ voluntary liquidation), or the shareholders in a general meeting (in a members’ voluntary liquidation) or, in both cases, the liquidator, agrees otherwise. In administration, the directors’ powers to exercise any management function, or actions that interfere with the administrator’s powers, cease unless prior consent is given by the administrator.

MATTERS ARISING IN A LIQUIDATION OR REORGANIZATION

Stays of proceedings and moratoria

22. What prohibitions against the continuation of legal proceedings or the enforcement of claims by creditors apply in liquidations and reorganizations? In what circumstances may creditors obtain relief from such prohibitions?

Liquidations

When a company is placed in compulsory liquidation, no action or proceeding may be started or proceeded with against the company or its property without the court’s permission. Permission will be refused if the proposed action raises issues that could be dealt with more conveniently and less expensively in the liquidation proceedings. However, this will not restrict claims made by secured creditors in respect of secured assets.

When a creditors’ voluntary liquidation (CVL) or members’ voluntary liquidation (MVL) is commenced, there is no automatic moratorium on proceedings against the company. The liquidator or any creditor or shareholder may, however, apply to the court for a stay on any proceedings. Such a stay will not be granted automatically, but will usually be granted where proceedings were commenced after the shareholder resolution.

Stand-alone moratorium

A stand-alone moratorium under Part A1 of the Insolvency Act 1986 (the Insolvency Act) is available to certain companies if they are, or are likely to become, unable to pay their debts, and the moratorium is likely to result in the rescue of the company as a going concern. There are many types of company that are ineligible for the moratorium, including companies that are party to a capital market arrangement in excess of £10 million, which excludes many larger companies that have issued bonds.

The moratorium protects the company from creditor action, granting a payment holiday for ‘pre-moratorium debts’, which are debts the company becomes subject to before the moratorium comes into force or debts that the company has become or may become subject to during the moratorium by reason of any obligation incurred before the moratorium comes into force.

Certain of the company’s pre-moratorium debts are not subject to a payment holiday and the company must continue to pay these during the moratorium. These include amounts payable in respect in respect of:

• goods or services supplied during the moratorium;
• rent in respect of a period during the moratorium;
• wages or salaries under a contract of employment (as well as redundancy payments); and
• debts or other liabilities that arise under a contract or other instrument involving financial services.

A company must also continue to pay its ‘moratorium debts’, which are the debts or other liabilities that the company becomes or may become subject to during or after the moratorium by reason of an obligation incurred during the moratorium. During the moratorium:

• no winding-up petitions may be presented against the company (except in certain scenarios, such as a winding-up petition presented by the directors of the company);
• no steps may be taken to enforce any security over the company’s property (unless enforcing a collateral security charge or security created or otherwise arising under a financial collateral arrangement);
• a landlord may not exercise a right of forfeiture by peaceable re-entry in relation to premises let to the company;
• no steps may be taken to repossess goods in the company’s possession under any hire-purchase agreement; and
• no legal process may be instituted, carried out or continued against the company or its property (except for certain employment-related proceedings).

A creditor may be able to take one or more of these steps with court permission, unless it relates to the enforcement of a ‘pre-moratorium debt’ for which the company has a payment holiday during the moratorium.

The moratorium is overseen by the monitor and lasts for an initial term of 20 business days, beginning with the business day after the day on which the moratorium comes into force. A moratorium may be extended if the eligibility conditions continue to be met. During the initial term, but after the first 15 business days of that initial term, the directors may seek to extend the moratorium:

• without creditor consent for a further 20 business days after the initial term ends;
• with creditor consent for up to one year, beginning with the first day of the initial term; and
• upon making an application to the court, to a date specified in the court order.

If the directors make a proposal for a company voluntary arrangement, the moratorium will end when the proposal is disposed of. If an application to the court is made for an order to convene meetings for a scheme of arrangement or restructuring plan, then the court may make an order that the moratorium be extended to such date as the court specifies.

The conduct of directors and monitors during the moratorium period can be challenged in court if it has unfairly harmed the interests of the applicant.

Reorganizations

The vast majority of reorganizations take place outside of formal insolvency proceedings. It will be up to the company and its creditors to negotiate a stay where required. This will be a purely contractual negotiation.

If the restructuring is implemented by way of a scheme or restructuring plan and if it has the support of the majority of creditors and so has a reasonable chance of success, the court has granted a temporary stay of proceedings against the company (FMS Wertmanagement AÖR v Vietnam Shipbuilding Industry Group & Ors [2013] EWHC 1146 (Comm) in relation to a scheme of arrangement and Riverside CREM 3 Ltd v Virgin Active Health Clubs [2021] EWHC 746 (Ch) in relation to a restructuring plan).

Companies have also used a scheme to achieve a standstill period in which to progress a restructuring. These schemes did not implement the actual restructuring but simply provided the means to achieve a moratorium that was not obtainable without cram down of creditors (Re Metinvest BV [2016] EWHC 79 (Ch) and Re DTEK Finance BV [2015] EWHC 1164 (Ch)).

Administration can also be used to implement reorganizations. An interim moratorium comes into force on the date when an application is made for the appointment of an administrator, or when notice of the intention to appoint an administrator is filed with the court. This interim moratorium is made final once the company has gone into administration. There is little difference in the extent of the temporary and the final moratorium. The moratorium means, among others, the following:

• no steps can be taken to enforce security over the company’s property or to repossess goods in the company’s possession under any hire-purchase agreement without the consent of the administrator or the court’s permission;
• a landlord may not exercise a right of forfeiture by peaceable re-entry in relation to premises let to the company without the consent of the administrator or the court’s permission; and
• no legal process (including legal proceedings, execution, distress and diligence) may be instituted or continued against the company or its property without the consent of the administrator or the court’s permission. This would include, for example, civil or criminal proceedings or other proceedings of a judicial or quasi-judicial nature.

Broadly speaking, permission to lift the moratorium will be granted by the court if to do so is unlikely to impede the achievement of the purpose of the administration. The court will engage in a balancing exercise, weighing the interests of the individual creditor seeking to lift the moratorium against the interests of the creditor body as a whole.

Doing business

23. When can the debtor carry on business during a liquidation or reorganization? Is any special treatment given to creditors who supply goods or services after the filing? What are the roles of the creditors and the court in supervising the debtor’s business activities?

Out-of-court reorganizations restructuring plans and schemes

A reorganization may be, and typically is, implemented outside of administration or liquidation. If there is a reasonable prospect that the company will avoid going into insolvent liquidation or administration, the debtor can continue to carry on business during a reorganization.

If there is a consensual restructuring process, the creditors involved may require additional information about the company during this process and increased access to management. Other creditors, for example, suppliers, may also change their terms of business to afford greater protection should the reorganization fail and the company subsequently go into insolvent liquidation or administration.

If no formal insolvency proceedings have commenced, creditors who continue to supply goods and services during the reorganization process will not be subject to a particular statutory regime. Existing contractual arrangements continue to apply.

Moratorium

The moratorium protects the company from creditor action, granting a payment holiday for pre-moratorium debts. The debtor can continue to carry on business during the moratorium, but the directors are restricted from engaging in certain acts, including:

• obtaining credit to the extent of £500 or more unless the person has been informed that the moratorium is in force;
• granting security over its property, unless the monitor consents;
• entering into a market contract or financial collateral arrangement;
• making one or more payments to a person in respect of pre-moratorium debts for which the company has a payment holiday that (in total) exceed £5,000 or 1 percentif the value of the debts and other liabilities owed by the company to its unsecured creditors when the moratorium began (unless court approval or monitor consent is given); and
• disposing of its property if not in the ordinary way of the company’s business (unless court approval or monitor consent is given).

The company must continue to pay its moratorium debts, which are the debts or other liabilities that the company becomes or may become subject to during or after the moratorium by reason of an obligation incurred during the moratorium. The monitor must bring the moratorium to an end if, among other reasons, they think that:

• the moratorium is no longer likely to result in the rescue of the company as a going concern;
• the objective of rescuing the company as a going concern has been achieved; or
• the company is unable to pay its moratorium debts or pre-moratorium debts for which the company does not have a payment holiday during the moratorium.

Administration

A reorganization could also be implemented via an administration of the debtor (or the debtor’s holding company). An administrator can carry on the business of the company where that is consistent with the purpose of the administration. To carry on the business, the administrator will pay creditors who supply goods or services to the company in administration in priority to ordinary unsecured creditors as expenses of the administration (otherwise the counterparty would not be likely to continue to trade). However, debts that had arisen before the insolvency will remain a provable debt and rank pari passu with other unsecured creditors.

Liquidation

Typically, a debtor does not carry on business activities during a liquidation process, although this has happened in the high-profile compulsory liquidation cases of Carillion and British Steel.

Restrictions on terminating contracts

Certain types of supplies are protected by legislation and suppliers are prevented from terminating their supply (regardless of contractual termination rights) where the company is in an insolvency process and the office holder requests the continued supply. These include public utilities, such as gas and electricity, as well as private suppliers of utilities, including supplies from a landlord to a tenant.

Also, communication services by a person whose business includes providing communication services as well as chip and PIN machines, computer hardware and software IT assistance connected to IT use, data storage and processing and website hosting services are ‘protected supplies’ if the relevant contract was entered into on or after 1 October 2015.

The Corporate Insolvency and Governance Act 2020 (the CIGA) introduced rules to supplement the existing ‘essential suppliers’ protections in the Insolvency Act. These apply where a company has become subject to a relevant insolvency procedure, which includes a CVA, an administration and a liquidation as well as a moratorium or a restructuring plan (but not a scheme of arrangement).

A provision of a contract for the supply of goods or services to the company ceases to have effect when the company becomes subject to the relevant insolvency procedure if and to the extent that, because the company becomes subject to the relevant insolvency procedure:

• the contract or the supply would terminate, or any other thing would take place; or
• the supplier would be entitled to terminate the contract or the supply, or to do any other thing.

There is no definition of ‘do any other thing’, although it is clearly intended to capture actions such as a price increase because of the insolvency. Once the company has entered into a relevant insolvency procedure, a supplier is also not permitted to terminate a supply contract on the basis of an event having occurred that would have allowed them to terminate the contract before the company entered into the relevant insolvency procedure.

A supplier cannot make it a condition of continued supply that the company pay any outstanding amounts owed in respect of goods or services supplied before the company becoming subject to the relevant insolvency procedure.

If the supplier’s right to terminate the supply contract arises after the relevant insolvency procedure begins (eg, for non-payment of goods or services supplied during the insolvency procedure), the supplier has the right to exercise this right.

The supplier may still be able to terminate the supply contract in circumstances where the insolvency office holder or company consents to the termination of the contract or supply or the court is satisfied that the continuation of the contract or the supply would cause the supplier hardship and grants permission for the termination of the contract.

Post-filing credit

24. May a debtor in a liquidation or reorganization obtain secured or unsecured loans or credit? What priority is or can be given to such loans or credit?

Liquidation and administration

A liquidator and an administrator can raise, on the security of the company’s assets, any money required. Such credit would have priority over ordinary unsecured creditors as an expense of the insolvency but only in respect of the new funds. Liquidation and administration expenses are also paid out of floating charge realizations in priority to payments to the floating charge holder.

However, in each case, any new loans and security will not take priority over pre-existing secured debt unless this is permitted under the terms of the pre-existing secured indebtedness and security documents.

Reorganization

In an informal restructuring, or a restructuring implemented by way of a scheme, restructuring plan or a CVA, the obtaining of credit and the use of assets as security is a matter for agreement between the company and its creditors and the type of restructuring process implemented. So, for example, security could be released as a consequence of a scheme of arrangement with the support of the requisite majority of creditors, but as a CVA is unable to bind secured creditors without their consent, this would not be possible in a CVA (unless the secured creditor agrees).

Moratorium

Once a company has entered into a moratorium, it cannot obtain credit to the extent of £500 or more unless the person has been informed that a moratorium is in force in relation to the company and may not grant security over its property without the consent of the monitor. The company must also continue to pay its moratorium debts, which are the debts or other liabilities that the company becomes or may become subject to during or after the moratorium by reason of an obligation incurred during the moratorium.

If a company enters into administration or liquidation within 12 weeks from the end of the moratorium, moratorium debts and ‘priority pre-moratorium debts’ for which the company did not have a payment holiday will have super priority and rank ahead of expenses of an administration and preferential debts in a liquidation. These debts can also not be compromised as part of a CVA or restructuring plan or scheme without the consent of those debtors.

A super-priority ranking cannot be obtained by lenders in respect of debt accelerated during the moratorium, but debt that has not been accelerated and falls due and payable during the moratorium will retain a super-priority ranking.

Sale of assets

25. In reorganizations and liquidations, what provisions apply to the sale of specific assets out of the ordinary course of business and to the sale of the entire business of the debtor? Does the purchaser acquire the assets ‘free and clear’ of claims or do some liabilities pass with the assets?

Reorganizations, restructuring plans and schemes

Where an out-of-court restructuring or a restructuring implemented using a scheme, a restructuring plan or a CVA also involves a sale of assets, there are no specific provisions applicable to the sale of specific assets. Such reorganizations are often combined with the exercise by the security agent of various provisions under intercreditor agreements relating to distressed disposals to transfer companies or assets free and clear of liabilities owed to parties to that intercreditor agreement.

Liquidations and administrations

Once a company has entered liquidation, the liquidator can sell any of the company’s property by public auction or private contract, provided the assets are beneficially owned by the company. A liquidator does not have the authority to sell free and clear of any security rights – therefore any sale of secured property made without the secured creditor’s release will be made subject to that security.

An administrator can sell assets that are subject to floating charge security as if the charge did not exist but will need the consent of the charge holder (or the court) to sell assets subject to fixed charge security. Where consent of the charge holder is obtained, it will be a matter for negotiation as to whether the asset is sold free and clear of the security (with the administrator accounting to the secured creditor for the purchase price) or whether the asset will be transferred subject to the security.

Where the court makes an order it will only do so provided that the proceeds of the sale are applied in repaying the fixed charge and the administrator makes good any shortfall between the sale price and the market value of the asset.

In addition, if a reorganization occurs in the context of an administration, the administrator can carry on the business of the company to sell its assets, including secured or leased assets, where the disposal would be likely to promote the purposes of the administration. Where the assets are leased, subject to a valid retention of title clause or are secured by a fixed charge, permission of the court is required before an administrator can sell the assets without the lessor’s or chargee’s consent.

Where the entire business (or a line of business) is sold by the administrator, a tool called ‘prepack administration’ is often used. A prepack is in essence a sale of the business or assets of an insolvent company by an administrator where all the preparatory work for the sale (ie, identifying the purchaser, negotiating the terms of the sale and valuing the assets – potentially but not always via a marketing process) takes place before the appointment of the administrator and the sale is then concluded immediately after their appointment.

The Administration (Restrictions on Disposal etc to Connected Persons) Regulations 2021/427 (the Prepack Regulations) provide for regulation of prepack sales to connected persons. Under the Prepack Regulations, where an administrator wishes to dispose of all or a substantial part of a company’s assets within the first eight weeks of the administration to one or more connected persons, the administrator will need to obtain an independent written opinion by an ‘evaluator’ (unless creditors have approved the sale).

This written opinion will be made available to all creditors in a report and a copy will need to be filed at Companies House (although commercially sensitive information can be redacted).

Where an opinion does not recommend the disposal, an administrator can still choose to proceed with the sale regardless, but they must provide a statement setting out their reasons for doing so. The Prepack Regulations do not restrict the number of evaluator opinions that can be obtained, but evaluators must state in their report that they have considered any previous reports obtained.

The definition of ‘connected person’ is adopted from existing insolvency legislation without modification and is broad. In particular, it covers directors and shadow directors of the relevant company, companies controlled by those directors or shadow directors, and any person or company that has control over the relevant company, including shareholders with a third or more voting rights.

Also, there exists guidance in the form of a statement of insolvency principle (SIP 16) for insolvency office holders in relation to their conduct of a prepacked sale.

Moratorium

During the moratorium, the company may only dispose of its property if, in the case of property that is not subject to a security interest, the disposal is made in the ordinary way of the company’s business, the monitor consents or the disposal is in pursuance of a court order. The monitor may only consent if they think that it will support the rescue of the company as a going concern.

Where there is property that is subject to a security interest, the company may dispose of the property in accordance with the terms of the security or, with permission of the court, may dispose of the property as if it was not subject to the security interest. Similar provisions apply to the disposal of goods that are in the possession of the company under a hire-purchase agreement in circumstances where a disposal may be carried out as if all of the rights of the owner under the high-purchase agreement are vested in the company (subject to receiving court permission).

Negotiating sale of assets

26. Does your system allow for ‘stalking horse’ bids in sale procedures and does your system permit credit bidding in sales?

There is no specific legislation that either prevents or encourages the use of ‘stalking horse’ bids in sale procedures. How a particular sale process is carried out will be at the discretion of the directors or insolvency office holder (as applicable), but regard needs to be shown to the duties owed to creditors, and procedural guidance such as the Administration (Restrictions on Disposal etc to Connected Persons) Regulations 2021/427 and SIP 16.

Credit bidding (including where the credit bidder is the assignee of the original creditor) in sales is permitted, although there is also no specific legislation on this point. The sale will not necessarily be the subject matter of a court decision, indeed in most cases, it will be up to the insolvency office holder to decide whether a particular deal is in the best interest of the creditors and so should be implemented.

Rejection and disclaimer of contracts

27. Can a debtor undergoing a liquidation or reorganization reject or disclaim an unfavorable contract? Are there contracts that may not be rejected? What procedure is followed to reject a contract and what is the effect of rejection on the other party? What happens if a debtor breaches the contract after the insolvency case is opened?

Reorganization, schemes, restructuring plans and CVAs

In an out-of-court reorganization, a scheme, a restructuring plan or a CVA, the debtor has no legal right to reject or disclaim an unfavorable contract.

Liquidation and administration

A liquidator may disclaim any onerous property. Onerous property is defined as any unprofitable contract and any other company property that is unsaleable, is not readily saleable or is such that it may give rise to a liability to pay money or perform any other onerous act.

Property is broadly defined and it includes money, goods, things in action, land and every description of property wherever situated and also obligations and every description of interest whether present or future or vested or contingent, arising out of, or incidental to, property.

A contract may be unprofitable if it gives rise to prospective liabilities and imposes continuing financial obligations on the company that may be detrimental to the creditors. But a contract is not unprofitable merely because it is financially disadvantageous; it is the nature and cause of the disadvantage that will be the determining factor.

A liquidator cannot disclaim a completed contract. Also, there are various specific types of contract in relation to financial markets that the liquidator cannot disclaim. The liquidator is not entitled to use their power of disclaimer to disturb accrued rights and liabilities – the disclaimer only terminates the contract as to liabilities accruing after the time of the disclaimer.

A liquidator can disclaim a contract by notice if it is unprofitable, or simply decline to procure its performance by the company. If the liquidator declines performance, then (in addition to other contractual remedies the counterparty may have) it can apply for rescission of the contract and claim for any damages that may be awarded. In either case, the contract comes to an end and the solvent party is left to prove damages for the loss resulting from the company’s breach of contract.

A disclaimer operates so as to determine, as from the date of the disclaimer, the rights, interests and liabilities of the company, but does not affect the rights or liabilities of any other person except so far as is necessary for the purpose of releasing the company from any liability.

A party aggrieved by a disclaimer can apply to the court to reverse the liquidator’s decision, but the court will not interfere unless the liquidator’s action was in bad faith or perverse. Any person suffering loss or damage in consequence of the operation of the disclaimer is deemed to be a creditor of the company and may prove for the loss or damage in the liquidation.

If a liquidator does not disclaim a pre-insolvency contract (where, for example, disclaimer is not available) but then breaches the terms of the contract, the counterparty will be entitled to damages for breach, which will rank as a provable debt.

An administrator does not ordinarily have the power to disclaim onerous property. The exception to this is that in certain special administration regimes, such as bank administration, an administrator can disclaim onerous property. As a matter of law, administration does not terminate contracts entered into by the company. Any termination provision must be expressly set out in the contract.

In practice, the administrator may choose not to comply with contracts entered into by the company before administration. An administrator may, for example, decide that the return for creditors is higher if a particular contract is not performed rather than if the contract continues to be complied with. This is a commercial decision where the administrator will consider their duties to the creditors as a whole.

Where an administrator has breached a contract that existed before the insolvency, any damages for breach will rank as a provable debt on a pari passu basis. Where an administrator breaches a contract entered into by them after the insolvency, damages for breach will rank as an expense of the administration and will therefore have ‘super priority’ (ie, be paid ahead of holders of floating charge security and unsecured creditors).

Intellectual property assets

28. May an IP licensor or owner terminate the debtor’s right to use the IP when a liquidation or reorganization is opened? To what extent may IP rights granted under an agreement with the debtor continue to be used?

There is no automatic right of a licensor or owner of IP to terminate the debtor’s right to use IP assets. This will be governed by the terms of the license and by insolvency law. The Corporate Insolvency and Governance Act 2020 introduced limits on rights to terminate contracts for the supply of goods and services on the customer’s insolvency – these limits may apply to IP licenses.

Personal data

29. Where personal information or customer data collected by a company in liquidation or reorganization is valuable, are there any restrictions in your country on the use of that information or its transfer to a purchaser?

When processing any personal data, a data controller must comply with:

• the UK General Data Protection Regulation (UK GDPR) (which derives from Regulation (EU) 2016/679 (GDPR)); and
• the Data Protection Act 2018.

Also, the UK Privacy and Electronic Communications Regulations regulate various types of direct marketing.

The UK Information Commissioner’s Office (ICO) has also issued codes of practice and guidance that an office holder should follow – including the data-sharing code, and guidance on direct marketing (which is to be replaced by a new – currently draft – direct marketing code once finalized).

Among other things, a data controller must process data lawfully, fairly and in a transparent manner. Data processors also have various obligations, although these are not as strict as the obligations on data controllers. There are also restrictions on sending data outside the United Kingdom.

An office holder usually requires a buyer of data to comply with its legal obligations, and to provide an indemnity to the seller and the office holder against any liability for failure to comply. This is often supported by an agreed form ‘fair processing’ notice, which the buyer must send to each customer to tell them that the buyer is now the controller of their data and to specify any new purposes for which the buyer might process the data.

In Re Southern Pacific Personal Loans [2014] Ch 426 (decided under the pre-GDPR data protection regime), an English court held that liquidators were not data controllers in their own right and were not personally responsible for the company’s compliance with data protection law. The liquidators instead acted as agents for the company in taking decisions on its behalf. However, the ICO’s data-sharing code does envisage that an office holder might be a data controller in some circumstances.

In February 2020, the ICO, the Financial Conduct Authority and the Financial Service Compensation Scheme published a joint statement, warning insolvency practitioners to be responsible when dealing with personal data. This followed incidents where office holders had unlawfully sold clients’ personal data to claims management companies.

The UK GDPR gives individuals a right to ask for a copy of their personal data that is being processed by a business (a subject access request (SAR)). A 2019 case examined whether administrators had a duty to comply with SARs (under the pre-GDPR law) (Green v SCL Group Ltd and others [2019] EWHC 954 (Ch)). The court held that the administrators had to consider the interests of the general body of creditors, the scope of their statutory duties and the need not to cause unfair harm to individual creditors.

On the facts of this case, the administrators had been justified in not carrying out the huge search that would have been required to respond to the SAR. The court also said that administrators had no general duty to investigate breaches of data protection law affecting third parties that occurred before their appointment. Those investigations were for external regulators to carry out.

The court also considered whether the administrators had a duty to comply with enforcement notices issued by the ICO. The court held that administrators have a duty, as officers of the court, to assist regulators in their investigations, but only to the extent that this does not conflict with achieving the purposes of the administration. Administrators must:

• ask themselves what they could do, within their powers of management as administrators, to enable the company to meet its obligations under an enforcement notice; and
• then assess whether it is in the interests of the creditors as a whole to take those actions.

In this case, there was no misconduct in the administrators’ decision not to reply to or appeal the enforcement notice. (Although, as a result of failing to comply with the notice, the ICO brought criminal proceedings and the company was fined. Those fines then ranked as unsecured claims in the administration.)

Arbitration processes

30. How frequently is arbitration used in liquidation or reorganization proceedings? Are there certain types of disputes that may not be arbitrated? Can disputes that arise after the liquidation or reorganization case is opened be arbitrated with the consent of the parties?

When a company is in administration or the new moratorium, the statutory moratorium will apply and will prevent any legal process from being initiated or continued. Similarly, a moratorium is in place in a compulsory liquidation. The courts have held that arbitration is a legal process and therefore caught by the moratorium. Arbitration of disputes that arise post-administration or moratorium would be subject to the same rules as regards whether the administrator or the courts would lift the moratorium to allow the arbitration to progress.

However, where the office holder seeks directions from the court (ie, initiates litigation themselves, for example in relation to a set-off right) the counterparty will be able to rely on the arbitration clause and force the office holder to arbitrate the claim instead of litigating.

The latter point was emphasized by the courts in Bresco Electrical Services Ltd (In Liquidation) v Michael J Lonsdale (Electrical) Ltd [2020] UKSC 25, which dealt with the question as to whether adjudication is available in an insolvency proceeding. The Supreme Court found that the existence of a cross-claim operating by way of insolvency set-off does not mean that the underlying disputes about the company’s claims under the contract and (if disputed) the cross-claim simply melt away so as to render them incapable of adjudication.

Furthermore, the court held that adjudication, on the application of the liquidator, is not incompatible with the insolvency process. The liquidator has statutory and contractual rights to adjudication, and it would be inappropriate for the court to interfere with the exercise of those rights.

It was noted that adjudication is not an exercise in futility, either generally or merely because there are cross-claims falling within insolvency set-off, and there is no reason why the existence of such cross-claims can constitute a basis for denying to the company the right to submit disputes to adjudication that Parliament has chosen to confer.

CREDITOR REMEDIES

Creditors’ enforcement

31. Are there processes by which some or all of the assets of a business may be seized outside of court proceedings? How are these processes carried out?

A secured creditor can potentially enforce their security outside of court proceedings by the appointment of a receiver or, in limited circumstances, an administrative receiver.

A receiver is appointed over specified assets charged by way of a fixed charge.

An administrative receiver is appointed where the secured creditor has a charge over the whole or substantially the whole of the company’s assets. Accordingly, an administrative receiver has wider powers to run the company, although their primary duty will be to the secured creditor. The administrative receiver, although an agent of the company, is primarily concerned with the recovery of sufficient assets to pay out to the debenture holder.

The almost inevitable consequence of the appointment of an administrative receiver is that the company will go into liquidation, as all or nearly all its assets are likely to be realized to repay the secured creditor.

A mortgagee may take physical possession of the property subject to the mortgage, and (where such property is not subject to consumer protection legislation) such possession does not require a court order.

Similarly, pursuant to the Financial Collateral Arrangements (No. 2) Regulations 2003, as amended, the parties may agree that, should the security subject to the arrangement become enforceable, the collateral-taker has the right to appropriate (ie, become the absolute owner of the collateral). However, in certain circumstances, relief from forfeiture may be available (and the appropriation may be set aside).

Unsecured credit

32. What remedies are available to unsecured creditors? Are the processes difficult or time-consuming? Are pre-judgment attachments available?

Certain creditors may have the benefit of a lien imposed by statute over the assets in their possession. A supplier of goods may protect themselves by inserting a clause in the supply contract to the effect that title to the goods supplied will not pass to the buyer until payment has been received (a retention of title (ROT) clause). The contract can either provide for retention of title until the specific goods have been paid for or, more usually, until all monies outstanding from the debtor have been paid. Where the ROT clause is effective, the creditor is entitled to the return of goods.

If none of the above remedies are available, then an unsecured creditor will need to commence proceedings against the debtor for debt recovery. If there is no substantive defense to the claim, the creditor can apply for summary judgment, which could take up to three months. If the debtor can show that it has a real prospect of successfully defending the claim, it could take much longer.

In the meantime, if the creditor has evidence that the debtor is likely to dissipate their assets, they can apply to the court for an order that assets up to the amount claimed be frozen or prevented from being dealt with or dissipated. Once a judgment has been obtained, then enforcement proceedings can commence. Remedies include sending a court officer to seize the debtor’s goods or diverting an income source directly to a creditor (a third-party debt order).

Creditors (including unsecured creditors) can also apply to the court for a winding-up order. Where a debt is genuinely disputed, the dispute should be resolved through the commercial courts. The courts have consistently held that a winding-up petition should not be used as a way to enforce a debt where there is a triable issue. Unsecured creditors are also able to apply to court for the appointment of an administrator.

CREDITOR INVOLVEMENT AND PROVING CLAIMS

Creditor participation

33. During the liquidation or reorganization, what notices are given to creditors? What meetings are held and how are they called? What information regarding the administration of the estate, its assets and the claims against it is available to creditors or creditors’ committees? What are the liquidator’s reporting obligations?

The Insolvency (England and Wales) Rules 2016 set out much of the process relating to each insolvency process. Generally, the Insolvency Act 1986 (the Insolvency Act) provides for early notification of all creditors by advertisement of the appointment. The Insolvency Act further provides that creditors are provided with a report on the conclusion of the winding up (a final report).

Administrators must seek a decision of creditors on proposals for the conduct of the administration of the company. The administrator is required to send a progress report to the creditors, the courts and Companies House every six months.

In a creditors’ voluntary liquidation (CVL), the directors must deliver a notice to creditors seeking their decision on the nomination of the liquidator by deemed consent or a virtual meeting. The decision date must be no earlier than three business days after the notice is delivered and no later than 14 days after the resolution is passed to wind up the company.

In the moratorium, the monitor must notify every creditor of the company of whose claim the monitor is aware as soon as reasonably practicable after receiving notice from the directors that the moratorium has come into force. The notice must specify when the moratorium came into force and when the moratorium will come to an end, subject to any alteration. The directors may seek the consent of pre-moratorium creditors to extend the moratorium to a date before the end of the period of one year beginning with the first day of the initial term.

A liquidator must also provide creditors with an annual progress report.

Creditor representation

34. What committees can be formed (or representative counsel appointed) and what powers or responsibilities do they have? How are they selected and appointed? May they retain advisers and how are their expenses funded?

Out of court reorganization, schemes, restructuring plans and company voluntary arrangements

In restructurings (whether out of court or using a more formal process to bind dissenting creditors), traditionally, the creditors have formed coordinating committees. These usually consist of the largest, or the most influential, creditors. Any appointment is a matter of contract between the creditors and the company (who ordinarily meets the costs of their advisers). More recently, there has been a shift from establishing formal coordination committees to creating groups of ad hoc creditor committees to drive a restructuring.

Liquidation and administration

In a formal insolvency process (eg, administration and liquidation), creditors’ committees can be formed. A creditors’ committee usually consists of between three and five creditors that have been voted into the committee by the creditors. However, the role of the creditors’ committee varies, taking into account the different natures of these insolvency procedures. If a liquidation committee is appointed in either a CVL or a compulsory liquidation, its role is mainly supervisory and to fix the liquidator’s remuneration.

The liquidator must report to the liquidation committee on a regular basis. The role of a creditors’ committee in an administration is substantially the same as in liquidation. The creditors’ committee in an administrative receivership does not have a supervisory role. However, the administrative receiver must provide certain information to the creditors’ committee.

Creditors’ committees appointed under the terms of the Insolvency Act are not permitted to retain advisers.

Moratorium

There are no creditors’ committees during a moratorium.

Enforcement of estate’s rights

35. If the liquidator has no assets to pursue a claim, may the creditors pursue the estate’s remedies? If so, to whom do the fruits of the remedies belong? Can they be assigned to a third party?

A liquidator or administrator can assign certain causes of action (eg, an action for fraudulent or wrongful trading). The proceeds of the claim or assignment are not to be treated as part of the company’s net property; that is to say, the amount of its property that would be available for the satisfaction of claims of holders of debentures secured by a floating charge created by the company.

Furthermore, a ‘victim’ of a transaction defrauding creditors may commence proceedings under section 423 of the Insolvency Act.

Claims

36. How is a creditor’s claim submitted and what are the time limits? How are claims disallowed and how does a creditor appeal? Can claims for contingent or unliquidated amounts be recognized? Are there provisions on the transfer of claims and must transfers be disclosed? How are the amounts of such claims determined?

Generally, unsecured creditors’ claims are not submitted until the company is in liquidation or administration. Court approval is required before an administrator can make a distribution to unsecured creditors (unless it is a distribution from the prescribed part). All creditors submit a claim by sending particulars of it to the liquidator (or administrator) by way of a ‘proof of debt’.

A creditor may make a claim in respect of a contingent or unliquidated amount provided that it arises before the date on which the company went into administration or liquidation, or it arises from an obligation to which the company may become subject after the insolvency by reason of any obligation incurred before the company entered liquidation or administration. Interest that accrued before the insolvency date can form part of the amount of the creditors’ provable debt.

Time limits may be set for receipt and processing of claims before interim dividends are paid. If the creditor misses the deadline, they will be entitled to receive previous interim dividends (to ‘catch up’) once the claim has been proved. Once the office holder has realized all the company’s assets, they will give notice of intention to declare a final dividend. The liquidator (or administrator) may reject a proof in whole or in part but must provide reasons to the creditors. A creditor may appeal to the court against a rejection within 21 days of receiving notice of it.

There are no specific provisions dealing with the purchase, sale or transfer of claims against the debtor and no prescribed forms for notifying the insolvency office holder of the trade. If a third party acquires a claim at a discount, it will be able to prove for the face value of the claim (the discount is simply a matter between the creditor selling the claim and the acquirer).

However, a creditor will not be able to circumvent the automatic and self-executing rules on insolvency set-off once they are triggered. Therefore, where set-off applies, a party will only be able to sell its net balance. In large and complex insolvencies, the office holder may propose a protocol for notifying them of trades.

Interest that accrued from the insolvency date can be claimed but is highly subordinated. Once a company in liquidation or administration has paid all provable debts in full, the Insolvency Act provides that creditors with provable debts are eligible to receive interest on those debts for the period from the start of the insolvency process to the date the debt was paid. The current rate of statutory interest is either 8 percent per annum or the interest rate applicable under the original contract, the greater amount prevailing.

Set-off and netting

37. To what extent may creditors exercise rights of set-off or netting in a liquidation or in a reorganization? Can creditors be deprived of the right of set-off either temporarily or permanently?

Prior to the commencement of a formal insolvency procedure or insolvency set-off becoming operative (whatever is the later), contractual rules on set-off and netting apply. These rules could be amended by agreement as part of an informal reorganization.

Insolvency set-off applies where there have been mutual dealings between a creditor and the company. The liquidator or administrator is required to take an account of what is due from each party to the other in respect of dealings and set off these sums.

Once applicable, set-off is mandatory, automatic and self-executing. Insolvency set-off is triggered immediately upon the commencement of a liquidation, but in administration, it is only triggered once the administrator has given a notice of intention to make a distribution in administration.

There are special provisions that apply to certain contracts in the financial markets.

Pursuant to the terms of the Financial Collateral Arrangements (No. 2) Regulations 2003, a close-out netting provision in a security document will apply even if the collateral provider or collateral taker is subject to winding-up proceedings or reorganization measures, unless at the time the arrangement was entered into or the relevant financial obligations came into existence the other party was or should have been aware of such winding up or reorganization.

Modifying creditors’ rights

38. May the court change the rank (priority) of a creditor’s claim? If so, what are the grounds for doing so and how frequently does this occur?

The court does not have general jurisdiction to change the priority of creditors’ claims, which are determined by statute. However, where realizations are made from assets subject to a floating charge, an insolvency office holder must set aside a percentage of such realizations (the prescribed part or ring-fenced fund) for distribution to unsecured creditors who would otherwise have ranked in priority below the holder of the floating charge.

The court has held that it has no jurisdiction to either extinguish statutory rights or promote lower-ranking creditors to a higher order in the statutory order of priority (see Re Nortel GmbH (Bloom v Pensions Regulator) [2013] UKSC 52 and Re Lehman Brothers International (Europe) (in administration) [2017] UKSC 38).

Priority claims

39. Apart from employee-related claims, what are the major privileged and priority claims in liquidations and reorganizations? Which have priority over secured creditors?

An office holder will apply the proceeds of the realized assets and pay creditors in a specified order depending upon the source of the proceeds (ie, whether they come from fixed charge realizations, floating charge realizations or the realizations of uncharged assets).

Other than the costs of preserving and realizing the fixed charge assets (including the office holder’s costs relating to those assets), there are no priority claims that rank ahead of secured creditors with a fixed charge in relation to the proceeds of sale of those assets.

Certain priority claims rank ahead of floating charge holders, and these are paid out of the proceeds of sale of the assets secured by the floating charge. These priority claims are preferential debts and payments to unsecured creditors out of the ‘prescribed part’.

Preferential debts are split into two categories: ordinary preferential debts and secondary preferential debts. Ordinary preferential debts include contributions to occupational and state pension schemes, certain employment-related claims or levies on coal and steel production.

They also include debts owed to the Financial Services Compensation Scheme (FSCS) and eligible deposits whose amount is protected under the FSCS. Secondary preferential debts consist of the part of deposits that are not eligible for FSCS protection either because they exceed the cover level or because they were made through a branch of an (otherwise) eligible credit institution located outside the European Economic Area.

Ordinary preferential debts rank equally among themselves before secondary preferential debts, which also rank equally among themselves. HMRC is a secondary preferential creditor for certain types of taxes, including pay as you earn and value added tax, for insolvencies commenced from 1 December 2020. HMRC is an unsecured creditor for all other tax liabilities owed directly by a company.

The ‘prescribed part’ is an amount ring-fenced from the company’s net floating charge proceeds (up to a maximum of £800,000 for floating charges created on or after 6 April 2020, and £600,000 for those created before 6 April 2020). This prescribed part is available to unsecured creditors.

Case law has clarified that a floating charge holder cannot participate in the prescribed part as an unsecured creditor regarding any shortfall under its floating charge, as this would effectively deprive the unsecured creditors of a substantial part of their already capped benefit. The only way in which a secured creditor could participate in the prescribed part is by releasing its security.

The costs and expenses of the liquidator or administrator are paid out of assets subject to a floating charge (so far as the assets of the company are insufficient), taking priority over the claims of the floating charge holder.

Creditors who can establish valid retention of title and other proprietary claims (eg, where they are beneficiaries under a trust) rank outside the order of insolvency claims and will, where possible and in accordance with certain legal rules, have their property (or its monetary equivalent) returned to the extent this is still possible.

If a company has entered into a moratorium and subsequently enters into administration or liquidation within 12 weeks of the end of the moratorium, moratorium debts and ‘priority pre-moratorium debts’ for which the company did not have a payment holiday will have super priority and rank ahead of expenses of an administration and preferential debts in a liquidation. These debts can also not be compromised as part of a company voluntary arrangement or restructuring plan or scheme without the consent of those debtors.

Employment-related liabilities

40. What employee claims arise where employees’ contracts are terminated during a restructuring or liquidation? What are the procedures for termination? (Are employee claims as a whole increased where large numbers of employees’ contracts are terminated or where the business ceases operations?)

Reorganization and schemes

In a reorganization taking place outside formal insolvency proceedings, the normal rules applicable to employment and the termination of employment contracts apply.

Liquidation

In a compulsory liquidation, the historically accepted position has been that contracts of employment will automatically terminate with immediate effect on the date of publication of the court order. The precise rationale for this is not clear and it is not certain that a court would now follow the historically accepted position where, for example, the liquidator decides to trade the company in liquidation.

Any termination of employment on a compulsory liquidation will usually involve a breach of contract by the company (as notice of termination will not have been given in accordance with the employment contract) – the employee will be able to claim for this non-payment of notice by means of a proof of debt in the liquidation.

In a voluntary liquidation, the liquidation does not automatically terminate contracts of employment. However, because a liquidator only has limited powers to carry on the business of the company, it is likely that the liquidator will terminate the employment contracts shortly after appointment.

Administration

Administration does not automatically terminate employment contracts. Following appointment, administrators have 14 days to decide whether the company should continue to employ individual employees. Failure to take positive action to dismiss will result in the automatic ‘adoption’ of employment contracts on the expiry of the 14-day period. ‘Adopted’ employees are then entitled to a priority for the payment of ‘qualifying liabilities’. Qualifying liabilities are wages and salary arising out of the employment contract after the start of the administration.

For this purpose, wages and salary also include holiday pay, sick pay, payments in lieu of holiday and certain contributions to occupational pension schemes. Qualifying liabilities are administration expenses and therefore payable out of the assets of the company in priority to most other claims, including the administrator’s fees and expenses.

Moratorium

The moratorium provides that wages or salary arising under a contract of employment or redundancy payments are not pre-moratorium debts for which a company will have a payment holiday. Furthermore, where proceedings for the winding up of a company are commenced before the end of the period of 12 weeks beginning with the day after the end of the moratorium, any prescribed fees or expenses of the official receiver and all moratorium debts and priority pre-moratorium debts are payable out of the company’s assets in priority to all other claims.

Priority pre-moratorium debts include wages or salary arising under a contract of employment, so far as relating to a period of employment before or during the moratorium, and any liability to make a redundancy payment that fell due before or during the moratorium.

Preferential debts

The following employee debts will be preferential debts:

• accrued holiday pay in respect of the period before the insolvency proceedings if the employment has terminated (no cap);
• certain deducted but unpaid employee pension contributions into occupational pension schemes in respect of a prescribed period before the start of the insolvency proceedings (no cap); and
• certain unpaid remuneration amounts owed for the four-month period before the start of the insolvency proceedings, capped at £800. Any amounts in excess of £800 will rank as an unsecured debt in the insolvency, although the employee should be able to claim certain amounts from the National Insurance Fund.

Payments made by the National Insurance Fund

Where a company is in formal insolvency proceedings and the employment is terminated, the employee will be able to apply to the Insolvency Service to have certain debts paid out of the National Insurance Fund, including unpaid statutory notice pay, arrears of pay (up to a maximum of eight weeks), holiday pay (up to a maximum of six weeks), statutory redundancy pay (if the employee has two or more years’ service) and certain unpaid or deducted pension contributions. The statutory cap on a week’s pay applies to these payments (£643 for 2023–2024).

The employee will need to claim the balance of any amounts owed (if these are not qualifying liabilities or preferential debts) by means of a proof of debt in the insolvency, ranking as an ordinary unsecured claim. Any payment from the National Insurance Fund extinguishes the employee’s claim against the company for that amount, with the Secretary of State then having a subrogated claim for that amount in the insolvency.

Unfair dismissal

In a compulsory liquidation, if the contracts of employment terminate by operation of law on the date of the court order there should, in principle, be no claims for unfair dismissal. In a voluntary liquidation or an administration, an employee could potentially bring a claim for unfair dismissal if the liquidator or administrator fails to follow a fair process in relation to the dismissal (eg, because the selection process was flawed or no individual consultation was undertaken).

The claim would, however, often be for procedural unfairness only, not substantive unfairness (as the dismissal should be by reason of redundancy and therefore substantively fair), which could result in limited compensation being awarded. The compensatory element of any unfair dismissal damages award would rank as an ordinary unsecured claim in the insolvency (the basic award is recoverable from the National Insurance Fund if the employee succeeds in their unfair dismissal claim in the Employment Tribunal).

Sale of the business

When an insolvency office holder sells part or all of the business of an insolvent company, the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) will determine which of the employees transfers automatically to the purchaser of the business and what liabilities transfer with them. The usual position under TUPE is that employees assigned to the target business transfer to the purchaser together with the liabilities under or in connection with their employment contracts (other than certain liabilities under occupational pension schemes).

In an insolvency context, the position differs from this depending on the type of insolvency proceedings. For example, where the transferor is in administration, certain debts will not transfer but will be payable by the National Insurance Fund. In a liquidation, TUPE is significantly modified and employees will not transfer automatically to a purchaser.

If an employee is dismissed who would have otherwise transferred to the purchaser, both the purchaser and the seller company (in administration) could potentially be liable for the resulting unfair or wrongful dismissal claims. Also, on a TUPE transfer, there is an obligation to inform and consult representatives of affected employees about the transfer.

Failure to comply with this obligation can result in the Employment Tribunal making a ‘protective award’, of up to 13 weeks’ pay (uncapped) per employee. The purchaser and seller will bear joint and several liability for any failure to comply, but the administrator will typically seek an indemnity from the purchaser in respect of any consultation liabilities arising.

Collective redundancies

If there is a proposal to dismiss 20 or more employees within a 90-day period at one establishment, collective redundancy consultation will be required with employee representatives, and the Secretary of State must be notified.

This consultation must start at least 30 days before the first dismissal if 20 to 99 dismissals are proposed, or 45 days before the first dismissal if 100 or more dismissals are proposed (notification to the secretary of state is required to be made within the same time frame). If the company fails to comply with these consultation requirements, then a protective award can be made of up to 90 days’ pay (uncapped) per employee, unless a ‘special circumstances’ defense applies (but insolvency is not, of itself, a special circumstance).

This protective award can qualify for preferential status (subject to the £800 cap) and may be payable (in part) by the National Insurance Fund. Failure to notify the Secretary of State is a criminal offence with an unlimited fine (which can also apply to a director or insolvency practitioner in default).

Pension claims

41. What remedies exist for pension-related claims against employers in insolvency or reorganization proceedings and what priorities attach to such claims?

Certain limited unpaid contributions into occupational pension schemes and contributions deducted from the employee’s pay are categorized as preferential debts and will rank ahead of floating charge holders in the event of a company’s insolvency.

Where there is a defined benefit occupational pension scheme and the employer company enters a formal insolvency process (eg, liquidation, administration or administrative receivership) and there is a deficiency in the scheme (calculating the cost of benefits based on an estimate of the cost of buying out equivalent benefits with an insurance company), then a section 75 debt (named after section 75 of the Pensions Act 1995) is triggered and deemed to arise immediately before the employer’s insolvency.

The section 75 debt is designed to provide a simple debt obligation on an employer and ranks as an ordinary unsecured debt in the employer’s insolvency. If an administrator adopts any employment contracts, liabilities under those contracts incurred after adoption will be paid as an administration expense. Such liabilities can include contributions to occupational pension schemes (but these will probably be frozen by the insolvency) and (probably) to personal pensions.

The statutory Pension Protection Fund (PPF) provides compensation for eligible defined benefit occupational pension scheme members on an employer’s insolvency. Partly to protect the PPF, the Pensions Regulator has statutory ‘moral hazard’ or ‘anti-avoidance’ powers under the Pensions Act 2004 to make third parties liable to provide support or funding to a defined benefit occupational pension scheme in certain circumstances.

The first key power is that the Pensions Regulator is able, if it considers it to be reasonable, to issue a contribution notice (CN) to an employer, or a person ‘associated’ or ‘connected’ with an employer. In a hypothetical insolvency, those involved (including those knowingly assisting) are potentially at risk of being required to make a contribution into the scheme of an amount up to the section 75 debt that would otherwise have been payable if, within a relevant period, transactions or reorganizations:

• are structured with a main purpose of avoiding or reducing pension liabilities;
• result in an act or failure to act that has, in the Pensions Regulator’s opinion, detrimentally affected in a material way the likelihood of accrued scheme benefits being received;
• since 1 October 2021, have a materially detrimental impact on the employer’s net profit before tax; or
• since 1 October 2021, have a materially detrimental impact on the pension scheme’s recoveries from the employer.

The second key power is that the Pensions Regulator can also, if it considers it to be reasonable, issue a financial support direction (FSD), which requires a party to put in place financial support (broadly, funding or guarantees) and maintain the financial support throughout the life of the scheme. FSDs may be issued against the participating employers or certain parties that are connected or associated with an employer.

A party might be at risk of an FSD if the employer participating in the scheme was a service company (ie, a company with accounts showing its turnover principally derived from providing services to other group companies) or ‘insufficiently resourced’ (did not have sufficient assets to meet 50 percent of the section 75 debt in relation to the scheme, and at that time there was a connected or associated person who did have sufficient resources to make up the difference).

The rules governing who can be associated or connected with an employer are very complex, but generally all wholly owned companies in a group are associated, and significant shareholders (over one-third) will have control and so be associated with the company and its subsidiaries. In the case of CNs, generally the directors of employers and of entities that control them are also associated.

In Re Nortel GmbH (Bloom v Pensions Regulator) [2013] UKSC 52, the Supreme Court held that an FSD issued against a company that is already in administration was a provable debt (and not an expense of the administration) as, essentially, the relevant facts making the company susceptible to becoming the target of such direction had arisen before the insolvency and provable debt status was thus consistent with the underlying regime imposing the liability.

The Pensions Regulator can only issue a CN or an FSD if it considers it reasonable to do so, and while this test is very broad in practice it provides some protection for the potential target against having liabilities imposed on them without some reasoned justification.

Finally, since 1 October 2021, there have been new criminal offenses (primarily prosecuted by the Pensions Regulator and punishable by up to seven years in prison) of ‘risking accrued scheme benefits’ (broadly, where any person engages in an act that they knew or ought to have known would have a materially detrimental impact on the scheme) and ‘avoidance of employer debt’ (broadly, where any person acts in a way that prevents the recovery of any employer debt).

The criminal offenses do not apply where the parties have a ‘reasonable excuse’ for their actions and can be committed by any person (not just parties that are associated or connected with the employer, so can include lenders and other commercial counterparties).

There is significant, highly public, political scrutiny of restructuring actions that are adverse to defined benefit pension schemes. Where an employer proposes a formal reorganization proceeding (eg, a company voluntary arrangement, scheme of arrangement or restructuring plan), the pension scheme will often be a significant creditor of the employer. It will often, but not always, be the PPF rather than the pension scheme trustee that exercises the scheme’s voting rights in the reorganization proceeding.

Employers typically need to engage in lengthy negotiations with the pension scheme (and, often, with the Pensions Regulator and the PPF) where the employer needs the scheme to vote in favor of the reorganization proceeding. Dependent on the extent of the employer’s need for the scheme’s support, it is likely that the scheme, the PPF and the Pensions Regulator will require significant concessions from the employer in return for the scheme’s support (which could, for instance, take the form of contributions or security).

Engagement with the trustee, the Pensions Regulator and the PPF will also be required where the employer proposes to compromise its obligation to the pension scheme – in this circumstance, the employer concessions required are typically more onerous than in a case where no compromise of the employer’s obligations to the scheme is proposed.

In all cases, engagement with the pensions stakeholders and, where possible, agreeing mitigation for any materially detrimental impact of restructuring actions on the pension scheme will help protect parties from potential civil and criminal liabilities under pensions legislation as described above.

Under the Corporate Insolvency and Governance Act, where a company enters a moratorium, the company is granted a payment holiday in relation to certain pre-moratorium debts. Although it is not completely clear from the Corporate Insolvency and Governance Act, it seems likely that pension debt (including deficit repair contributions, section 75 debts and moral hazard liability imposed by the Pensions Regulator) are subject to the payment holiday.

Financial debt also continues to be payable during the moratorium, which would have super priority over the claims of the pension scheme where the company enters into administration or liquidation within 12 weeks of the end of the moratorium.

Where an employer proposes a moratorium, the PPF and the Pensions Regulator have information rights in respect of the moratorium (eg, they will be informed once a moratorium comes into force or is extended). Also, the PPF has certain rights in relation to the moratorium, such as the right to vote on certain qualifying decision procedures to the exclusion of the pension scheme trustees, and rights to challenge the monitor or the company directors.

Environmental problems and liabilities

42. Where there are environmental problems, who is responsible for controlling the environmental problem and for remediating the damage caused? Are any of these liabilities imposed on the insolvency administrator personally, secured or unsecured creditors, the debtor’s officers and directors, or on third parties?

Liability for environmental problems in insolvency proceedings can potentially involve criminal liability, civil liability or administrative liability (ie, liability to ‘clean up’). There is a plethora of legislation both at the domestic level and derived from EU legislation that sets out environmental duties and responsibilities and deals with breaches of such duties. Significant legislative controls aimed at environmental protection in the United Kingdom include:

• the contaminated land regime (under Part IIA of the Environmental Protection Act 1990);
• the environmental permitting regime (under the Environmental Permitting (England and Wales) Regulations 2016); and
• the water pollution regime (also contained principally in the Environmental Permitting (England and Wales) Regulations 2016, regulations 12(1) and 38(1)).

A company’s environmental liabilities (including health and safety related liabilities) will continue regardless of whether the company is solvent or in an insolvency process.

A debtor’s officers and directors can potentially be liable under environmental legislation that governs the respective debtor’s business (eg, where the commission of a pollution-related offence by the company occurs with the consent or connivance or is attributable to any neglect on the part of such persons). Depending on the legislation, liability can attach to the debtor company and to directors and officers personally.

This includes, in respect of a director’s general duty under section 172 of the Companies Act 2006, to act in a way that they, in good faith, consider most likely to promote the success of the company for the benefit of its members as a whole, having regard (among other things) to the impact of the company’s operations on the environment.

Ordinarily, an insolvency office holder should not incur liability for offenses or torts committed by the debtor before the insolvency, and any fines issued before the insolvency would rank as an unsecured debt. Following the insolvency, the office holder will be acting in a management role similar to that of directors and will be subject to the duties (and potential liabilities) that go with that role. A potential risk for an office holder is to be required to clean up contaminated land.

Should fines or clean-up costs be imposed when a company is in insolvency, such costs may still rank as a provable debt (if they can be attributed to steps taken before the insolvency). Alternatively, such costs could rank as expenses of the insolvency if they are attributable to something done during the period after insolvency. This will be a matter of fact in each case. Whether an insolvency office holder would be held personally responsible will depend on the particular statute under which the offence is committed and the office holder’s conduct.

For example, the Environmental Protection Act 1990, dealing with contaminated land, includes a specific protection for insolvency office holders and specifies that no personal liability will attach to them for remedial costs unless a substance was present on the contaminated land as a result of any act done or omission made by the office holder that it was unreasonable for a person acting in that capacity to do or make.

This exclusion, however, is not set out as regards other forms of liability (not in relation to contaminated land) where office holders could therefore in theory still be at risk of personal liability.

A liquidator can disclaim onerous property and will be able to disclaim contaminated land and therefore avoid liability following the disclaimer becoming effective.

A secured creditor could potentially become liable for environmental contamination if it enforces a mortgage and becomes a mortgagee in possession. Under environmental legislation, a mortgagee in possession is an ‘owner’ and therefore liability could attach. In relation to an unsecured creditor, it is difficult to see how they could become liable (unless they act in a different capacity to that of unsecured creditor).

A third party may incur environmental liabilities where, for example, it caused the environmental damage following the principle that the polluter pays.

Environmental laws after Brexit

Following the end of the transition period on 31 December 2020, certain EU environmental laws were retained to ensure continuity. While most of the material obligations remain the same, the United Kingdom has slowly started to diverge from EU environmental laws post-Brexit, with there being potential for further divergence in future. To date, the United Kingdom has brought in limited legislation that diverges from the European Union.

The schedule to the Retained EU Law (Revocation and Reform) Act 2023 lists 342 pieces of retained EU environmental legislation that have been deemed superseded or no longer needed by the Department for Environment, Food and Rural Affairs (DEFRA), and that will be revoked on 31 December 2023. Included among these are pieces of EU legislation underpinning the National Air Pollution Control Program.

DEFRA has also updated its environmental land management system in England, which replaces the EU Common Agricultural Policy of subsistence payments for farmers.

The Environment Act 2021 empowers the Secretary of State to set legally binding environmental targets lasting at least 15 years. The targets concern 13 areas relating to biodiversity, woodland and trees outside woodland, water, marine protected areas, residual waste and fine particulate matter. Each of the long-term targets in the Act will be accompanied by non-statutory interim targets of up to five years in duration. The current targets are found in the Environmental Improvement Plan (EIP) 2023, published on 31 January 2023.

The Environment Act 2021 also introduced the Office for Environmental Protection (OEP), an independent watchdog to replace the supervisory function of the European Commission and the European Environment Agency.

The OEP is responsible for monitoring and taking enforcement action in relation to breaches of environmental law by the government and other public bodies. It became fully operational in January 2022. Additionally, the OEP must prepare an annual monitoring report on the government’s progress in improving the natural environment in accordance with the EIPs and targets set.

Liabilities that survive insolvency or reorganization proceedings

43. Do any liabilities of a debtor survive an insolvency or a reorganization?

Where a debtor uses a company voluntary arrangement (CVA), a restructuring plan or a scheme to reorganize, the terms of the CVA, restructuring plan or scheme will determine the treatment of the debtor’s liabilities (eg, the extent to which they are compromised and the extent to which they will survive).

If a company has entered into a moratorium and subsequently enters into administration or liquidation within 12 weeks of the end of the moratorium, moratorium debts and ‘priority pre-moratorium debts’ for which the company did not have a payment holiday will have super priority and rank ahead of expenses of an administration and preferential debts in a liquidation. These debts can also not be compromised as part of a CVA or restructuring plan or scheme without the consent of those debtors.

Where a purchaser buys the assets from an insolvent debtor, liabilities remain with the debtor, apart from certain employment liabilities that may transfer to the purchaser in accordance with TUPE.

Distributions

44. How and when are distributions made to creditors in liquidations and reorganizations?

In liquidations, a distribution will be made when sufficient funds are available to justify it. An administrator can also make distributions to preferential, secured and unsecured creditors (but only with the permission of the court in the case of unsecured creditors unless it is a distribution of the prescribed part). Distributions can be made on an interim and a final basis.

In the case of a reorganization, the terms of any distribution will usually be set out in the restructuring plan, the scheme or in the CVA proposals.

SECURITY

Secured lending and credit (immovables)

45. What principal types of security are taken on immovable (real) property?

The principal type of security granted over immovable property is the legal mortgage. This is a transfer of the whole of the debtor’s legal ownership in the property subject to the security. It is subject to the debtor’s right to redeem the legal title upon repayment of the debt (known as the equity of redemption). The appearance of ownership remains with the debtor, although the legal mortgage affects an absolute transfer subject to the right of redemption.

An alternative is the equitable mortgage, which creates a charge on the property but does not convey any legal estate or interest to the creditor. It can be created by a written agreement to execute a legal mortgage, by a mortgage of an equitable interest or by a mortgage that fails to comply with the formalities for a legal mortgage.

Another alternative is the fixed charge. This involves no transfer of ownership but gives the creditor the right to have the designated property sold and the proceeds applied to discharge the debt. A fixed charge attaches to the property in question immediately on creation (or, if acquired later, after creation but immediately on the debtor acquiring the rights over the property to be charged). The debtor may then only dispose of the property once the debt has been repaid or with the consent of the creditor.

Secured lending and credit (movables)

46. What principal types of security are taken on movable (personal) property?

The principal types of security relating to movable property are mortgages and fixed charges, floating charges, pledges and liens.

A floating charge does not attach to a specific asset but is created over a class of assets, present or future, and allows the debtor to buy and sell such assets while the charge remains floating. Floating charges are generally created over the whole business and undertaking of a company.

It is only on the happening of a certain event, such as default on the repayment of the debt, that the charge attaches to the secured assets that are at that time owned by the debtor. This is called ‘crystallization. On crystallization, the charge acts like a fixed charge in that the debtor is no longer free to sell the assets without repayment of the debt or without the consent of the creditor.

A pledge is a form of security that gives the creditor a possessory right to the pledged asset. It is usually created by delivering the asset to the creditor, although symbolic or constructive delivery may be sufficient.

A lien is a possessory right of a creditor to retain possession of a debtor’s asset until the debt has been repaid. It can be created by contract or by operation of law. The creditor has no right to deal with the asset and the lien is usually extinguished once the asset is returned to the debtor.

The Financial Collateral Arrangements (No. 2) Regulations 2003, as amended (the FCA Regulations) were originally adopted to give effect in England and Wales to Directive 2002/47/EC on financial collateral arrangements to create a simple, effective legal framework for the use of securities (financial instruments) and cash as collateral by title transfer or pledge, removing burdensome formalities of execution, registration and enforcement.

They also disapply certain provisions of the Insolvency Act 1986. The FCA Regulations only apply to security over cash (including claims for repayment of money), credit claims (loans made available by credit institutions), financial instruments and shares.

CLAWBACK AND RELATED-PARTY TRANSACTIONS

Transactions that may be annulled

47. What transactions can be annulled or set aside in liquidations and reorganizations and what are the grounds? Who can attack such transactions?

There are two main types of transaction that may be set aside by a liquidator or administrator under the Insolvency Act 1986 (the Insolvency Act). These are transactions at an undervalue (section 238) and preferences (section 239).

A transaction at an undervalue is a transaction entered into for no consideration or for consideration that is significantly less than the consideration provided by the company. A liquidator or administrator can apply to the court for an order restoring the position to that which it would have been in the absence of such a transaction.

It is a defense to a claim if the company entered into the transaction in good faith for the purpose of carrying on the business of the company, and there were reasonable grounds for believing that the transaction would benefit the company.

A company grants a preference where it does something, or allows something to be done, that puts a creditor, surety or guarantor in a better position than it would otherwise have been in if the company went into insolvent liquidation. The court will, however, only make an order restoring the position to what it would have been if the company was influenced by a desire to put that other person in that better position. This desire to prefer is presumed where the parties are ‘connected’ (as defined in the Insolvency Act).

The court will not make any order unless, at the time of entering into the transaction at an undervalue or making the preference, the company was unable to pay its debts, or became unable to pay its debts as a consequence of the transaction. Insolvency is, however, presumed in the case of a transaction at an undervalue entered into with a connected person.

In addition to transactions at an undervalue and preferences, certain floating charges will also be invalid under section 245 of the Insolvency Act, except to the extent of any valuable consideration (being money, goods or services supplied, or a discharge or reduction of any debt or interest). No application to court is required.

Separately, an administrator or a liquidator may apply to the court to set aside an extortionate credit transaction. Furthermore, a liquidator, administrator or ‘victim’ of the transaction may challenge any transaction that is entered into at an undervalue where the purpose of making the transaction was to put assets beyond the reach of a person who is making or may make a claim against the company (section 423 of the Insolvency Act).

In a compulsory liquidation, any disposition of the company’s property and any transfer of shares made after the commencement of the winding up is, unless the court orders otherwise, void.

Where directors have made a distribution to shareholders that is unlawful under the companies’ legislation, any shareholder who knows or has reasonable grounds to believe that a distribution contravenes the statutory rules will be liable to repay it.

Under English law, there are no specific legislative provisions that allow for transactions to be annulled as a result of a reorganization (unless such reorganization utilizes an administration process).

Equitable subordination

48. Are there any restrictions on claims by related parties or non-arm’s length creditors (including shareholders) against corporations in insolvency or reorganization proceedings?

There are no equitable subordination rules in English insolvency law. The rules for distribution of an insolvent estate are set out in the Insolvency Act and Insolvency (England and Wales) Rules 2016, and shareholders are last in the order of distribution in respect of their share capital, after secured and unsecured creditors have been satisfied in full. Related parties or non-arm’s length creditors will rank pari passu with the remainder of the unsecured creditors unless they have security, in which case they will rank in accordance with the security ranking.

Lender liability

49. Are there any circumstances where lenders could be held liable for the insolvency of a debtor?

In England, a lender will not be held liable for the insolvency or deepening the insolvency of a debtor. It is for the directors of the company, acting in accordance with their duties, to decide whether to enter into a loan. A lender must be careful not to act as a shadow director, otherwise liability as a director can arise. There is also no liability if a lender makes a demand for repayment of a loan that the debtor cannot fulfil and therefore files for insolvency. However, there may be liability if a lender refuses to lend when it is not contractually entitled to stop.

GROUPS OF COMPANIES

Groups of companies

50. In which circumstances can a parent or affiliated corporation be responsible for the liabilities of subsidiaries or affiliates?

In principle, each corporate entity has its own existence, and the corporate veil will only be rarely pierced, so the circumstances where a parent or affiliated company could be liable for its subsidiaries or affiliates are few. There are certain, limited, exceptions to this principle, for example, as relates the powers of the UK Pensions Regulator or in relation to certain environmental, health and safety or antitrust matters.

A parent company can be held liable for the acts of a subsidiary pursuant to the law of agency; however, there is no presumption that a subsidiary is the agent of the parent company. In very limited circumstances the English courts will permit the piercing of the corporate veil to allow action to be taken against those who control a company.

A parent company may also be liable for the acts of its subsidiaries under the torts of conspiracy and negligence. In particular, there can be a primary, direct duty of care on a parent company to employees (and potentially others) affected by the activities of a subsidiary under the tort of negligence.

A parent could also be held liable if it is considered a person instructing an unfit director – this could be the case where the parent is taken to have exercised the requisite amount of influence over a director who, as a result of acting on the parent’s directions or instructions, got disqualified under the Company Directors Disqualification Act 1986.

A parent company could be held liable for fraudulent trading or, if it has acted as a shadow director, for wrongful trading under sections 213 and 214 of the Insolvency Act 1986 respectively.

The concept of distributing a group company’s assets pro rata without regard to the specific corporate entities infringes the fundamental concept that each company has its own legal entity and that creditors are creditors of the respective company with which they have contracted, and not creditors of a group. This fundamental concept will only be lifted in cases of fraud or where there is a deliberate intention to put assets beyond the reach of creditors.

Combining parent and subsidiary proceedings

51. In proceedings involving a corporate group, are the proceedings by the parent and its subsidiaries combined for administrative purposes? May the assets and liabilities of the companies be pooled for distribution purposes?

English law treats each member of a corporate group as a distinct entity from any of its members, other than in very specific and rare circumstances. Accordingly, unless there are very exceptional circumstances, the assets and liabilities of companies are not combined into one pool for distribution in an insolvency process.

The case of Re Bank of Credit and Commerce International SA (No. 3) [1993] BCLC 1490 is an example of such a rare situation, where it was held that the assets and liabilities of the different companies in a group were so intermingled that it was impracticable to separate them.

As a practical matter, where there is a corporate group, there may be administrative advantages to having the same insolvency office holder appointed in respect of each of the companies in the group (subject to any conflicts), but each entity will still be treated as separate.

INTERNATIONAL CASES

Recognition of foreign judgments

52. Are foreign judgments or orders recognized, and in what circumstances? Is your country a signatory to a treaty on international insolvency or on the recognition of foreign judgments?

There are a number of tools available to obtain recognition of a judgment – in addition to methods provided for by the common law, these include, for insolvency proceedings or civil litigation commenced before 31 December 2020 at 11pm, Regulation (EU) 2015/848 (the Regulation on Insolvency Proceedings Recast) (the EU Insolvency Regulation) and Regulation (EU) No. 1215/2012 (the Brussels Regulation Recast).

Also, attention must be paid to the Civil Procedure Rules and the different tools available to litigators in England to enforce a foreign judgment (eg, the Foreign Judgments (Reciprocal Enforcement) Act 1933).

The common law rule that judgments in person are recognized only where a defendant is present in the foreign jurisdiction when proceedings are initiated, is a claimant or counterclaimant in the proceedings or has submitted to the jurisdiction of the foreign court also applies in an insolvency context (see Rubin and another v Eurofinance SA and New Cap Reinsurance Corporation (in liquidation) and another v Grant and others [2012] UKSC 46).

UNCITRAL Model Laws

53. Have any of the UNCITRAL Model Laws on Cross-Border Insolvency been adopted or is adoption under consideration in your country?

The United Kingdom has adopted the UNCITRAL Model Law on Cross-Border Insolvency. The Cross-Border Insolvency Regulations (CBIR) implemented the UNCITRAL Model Law on Cross-Border Insolvency in Great Britain (ie, excluding Northern Ireland). The CBIR entitles a foreign insolvency representative to apply directly to the British courts to commence British insolvency proceedings, to participate in British insolvency proceedings and to seek recognition and relief for foreign insolvency proceedings.

Foreign proceedings will be recognized as ‘foreign main proceedings’ where insolvency proceedings have been opened in the jurisdiction where the debtor’s center of main interests (COMI) is located.

There is a rebuttable presumption that a debtor’s COMI is in the place of its incorporation. If insolvency proceedings have been opened in a jurisdiction where the debtor has an establishment only, the insolvency proceedings will be designated ‘foreign non-main proceedings’. Relief is automatic in the case of recognition as a foreign main proceeding and includes an automatic stay and discretionary in the case of a foreign non-main proceeding.

The stay is, however, subject to the same exceptions and limitations as would be the case in an English proceeding. The stay also does not affect the right of any secured creditor to enforce their security over the debtor’s property, to repossess goods in the debtor’s possession under a hire-purchase agreement or to exercise a right of set-off against a debtor’s cross-claim. It is, however, open to parties to apply for a wider stay.

The UK government has stated its intention to adopt the UNCITRAL Model Law on Enterprise Group Insolvency at the earliest opportunity. This model law provides tools to manage and coordinate insolvencies within corporate groups, while respecting that each company within the group remains a separate legal entity.

The UK government has further stated its intention to implement the Model Law on Recognition and Enforcement of Insolvency-Related Judgments – which deals with cross-border recognition of judgments that are associated with insolvency proceedings. However, the government has indicated that further work will be undertaken first to ensure that legal clarity can be maintained and other principles of UK law will be supported when adopting the model law.

Foreign creditors

54. How are foreign creditors dealt with in liquidations and reorganizations?

Most foreign creditors will be able to provide evidence of their claims in an English liquidation in the normal way. If there is a concurrent liquidation of the same company in the foreign jurisdiction, then a creditor proving its claim in England will only be entitled to share in any distribution once any amount received in the foreign proceedings have been taken into account.

Foreign currency debts are converted into sterling under mandatory provisions of the Insolvency Act 1986 (the Insolvency Act) and the Insolvency (England and Wales) Rules 2016. Regarding foreign tax authorities, common law provides (Government of India v Taylor [1955] AC 491) that these cannot be proved in an English insolvency proceeding.

However, under Council Directive 2010/24/EU, EU revenue collection agencies can request recovery assistance from HMRC to collect taxes and other duties. Under article 100 of the Withdrawal Agreement, this Directive will continue to bind the United Kingdom until at least five years after the end of the transition period.

If there is a concurrent liquidation of the same company in the foreign jurisdiction, then a creditor proving its claim in England will only be entitled to share in any distribution once any amount received in the foreign proceedings has been taken into account.

Cross-border transfers of assets under administration

55. May assets be transferred from an administration in your country to an administration of the same company or another group company in another country?

Assets would only properly transfer to an insolvency proceeding in another country where the office holder determined that the assets were not in fact assets of the company. In this case, the entity rightfully entitled to the assets would be entitled to claim these. Given the office holder’s duty to ensure the best return to creditors, they would not consent to the transfer of such assets without incontrovertible evidence that this was the case or there was a sale of the assets for value.

COMI

56. What test is used in your jurisdiction to determine the COMI (center of main interests) of a debtor company or group of companies? Is there a test for, or any experience with, determining the COMI of a corporate group of companies in your jurisdiction?

Before 31 December 2020 at 11pm, the test that the United Kingdom used to determine COMI derived from the EU Insolvency Regulation and its case law. After Brexit, the Insolvency (Amendment) (EU Exit) Regulations 2019 (SI 2019/146) retained the EU Insolvency Regulation (with modifications) (the Retained EU Insolvency Regulations) and COMI is now defined in the Insolvency (England and Wales) Rules 2016 by reference to the Retained EU Insolvency Regulations.

The definition of COMI is substantially the same as the definition of COMI pre-Brexit, subject to some wording to reflect the fact that the United Kingdom is no longer an EU member state.

In a case in 2021, the High Court confirmed that the test for COMI after Brexit is determined objectively and must be ascertainable by third parties, particularly its creditors (see Re Investin Quay House Ltd (a company registered in Jersey with company number 114622) [2021] EWHC 2371 (Ch)).

The UNCITRAL Model Law on Cross-Border Insolvency (the Model Law), as applied in the United Kingdom by virtue of the CBIR, also uses the concept of COMI and is referenced to the Retained EU Insolvency Regulations.

The highest authority on the UNCITRAL Model Law in England is the case of Re Stanford International Bank Ltd (in liquidation) [2010] EWCA Civ 137 (although this predates Brexit).

The Court of Appeal has held that there is nothing in the Model Law or the EU Insolvency Regulation that required a different meaning to be given to COMI in both of the regimes.

Cross-border cooperation

57. Does your country’s system provide for recognition of foreign insolvency proceedings and for cooperation between domestic and foreign courts and domestic and foreign insolvency administrators in cross-border insolvencies and restructurings? Have courts in your country refused to recognize foreign proceedings or to cooperate with foreign courts and, if so, on what grounds?

There are various tools available to a foreign office holder to obtain recognition of foreign insolvency proceedings in England, depending on the circumstances of the foreign proceeding:

• for insolvencies commenced before 31 December 2020 at 11pm under the EU Insolvency Regulation;
• under the CBIR;
• under the common law; and
• under section 426 of the Insolvency Act.

The latter allows a ‘relevant country or territory’ (the Channel Islands, the Isle of Man or any country or territory designated by the Secretary of State – mostly Commonwealth countries but with certain notable exceptions, such as India) to apply to the English courts for assistance. The assistance is wide-ranging and can include the making of an administration order.

Courts have, however, also refused to recognize foreign proceedings, for example, in Re Stanford International Bank Ltd (in liquidation) [2010] EWCA Civ 137, the Court of Appeal refused to recognize a US receiver on the basis of its consideration of where the company had its COMI, using an interpretation of COMI that was consistent with its interpretation under the EU Insolvency Regulation. Instead, the court recognized the appointment of an Antiguan liquidator as foreign main proceedings.

While not directly relevant to the laws of England and Wales, the Privy Council held (in a case on appeal from Bermuda) in the case of Singularis Holdings Ltd v PricewaterhouseCoopers (Bermuda) [2014] UKPC 36 that while there was a common law power to cooperate and assist a foreign liquidator in their conduct of insolvency proceedings in a different jurisdiction, such power does not extend to providing a liquidator with a power that they did not have in their home jurisdiction.

The English courts have, in recent years, tended to row back from an earlier tendency to grant cooperation and relief based on the common law (see the case of Rubin), even where this could not be founded on specific legislation (eg, section 426 of the CBIR). The court also held that it does not have jurisdiction under the CBIR to grant a permanent stay on legal enforcement in respect of English law debt owed by a foreign company.

This would infringe the common law rule in Antony Gibbs (1890) 25 QBD 399, which stipulates that English law governed legal obligations can only be discharged under English law (unless the creditor agrees otherwise) (see Bakshiyeva v Sberbank [2018] EWHC 59 (Ch)).

Cross-border insolvency protocols and joint court hearings

58. In cross-border cases, have the courts in your country entered into cross-border insolvency protocols or other arrangements to coordinate proceedings with courts in other countries? Have courts in your country communicated or held joint hearings with courts in other countries in cross-border cases? If so, with which other countries?

Insolvency protocols have been used in cross-border insolvencies between the United Kingdom and the United States to harmonize proceedings between the two countries; for example, in 1991 in the Maxwell Communications Corporation case. In the Lehman Brothers case, it was clear that because of the volume and size of the claims involved, and the international dimension of the business, international cooperation would be of paramount importance.

In 2009, Lehman Brothers administrators in several jurisdictions signed a protocol that focused on cooperation and exchange of information. Crucially, the English administrators did not sign the protocol. In a report to creditors, the English administrators said it was not in the best interests of the English Lehman Brothers entity to ‘be party to or bound by such a broad arrangement’.

Winding-up of foreign companies

59. What is the extent of your courts’ powers to order the winding-up of foreign companies doing business in your jurisdiction?

The English courts can wind up a foreign company where that company has ‘sufficient connection’ with England and Wales. The question as to what constitutes sufficient connection is a factual one, but recent case law in relation to schemes of arrangement (where the court’s jurisdiction also hinges on whether there is jurisdiction to wind up a (foreign) company) has continually reduced the threshold. A foreign company with either its COMI or an establishment in England has sufficient connection with England.

Equally, in the context of schemes of arrangement, there are a number of cases where sufficient connection was demonstrated because the finance documents were governed by English law and contained a clause granting (exclusive and non-exclusive) jurisdiction in favor of the English courts. The English courts have taken an expansive view of sufficient connection (even where this is established late and for the purpose of the scheme).

UPDATE AND TRENDS IN RESTRUCTURING AND INSOLVENCY IN UNITED KINGDOM (UK)

Trends and reforms

60. Are there any emerging trends or hot topics in the law of insolvency and restructuring? Is there any new or pending legislation affecting domestic bankruptcy procedures, international bankruptcy cooperation or recognition of foreign judgments and orders?

Legislation to bring into effect the UNCITRAL Model Law on Enterprise Group Insolvency is awaited. Similarly, in due course, legislation to implement the Model Law on Recognition and Enforcement of Insolvency-Related Judgments is expected.

* The information in this chapter was accurate as at January 2024.

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