INS10159 - Introduction to Voluntary Arrangements

Business Rescue

Insolvency is not necessarily the end of the line for a business. Rescue might be possible.

An individual's business may survive beyond a bankruptcy – by an individual voluntary arrangement (IVA).

A company's business may be saved in several ways using insolvency legislation

Fixed charge receivership

Usually, secured lenders who hold legal mortgages or fixed charges over specific assets such as property or book debts appoint receivers to realise the charged assets. They receive payment of their capital debt and interest. Any surplus funds are returned to the company. The business will not survive if the asset sold was key to its business for example, a hotel property.

Administrative receivership

This is a remedy for secured creditors who hold floating charges over the whole, or substantially the whole of a company’s assets. When a charge made before 15 September 2003 still exists, secured creditors may appoint an administrative receiver to realise charged assets. This generally means all assets are sold off leaving the company as an empty shell.

A business will survive under new ownership if a receiver sells it as a going concern, but it will disappear if the receiver sells separate assets on a break up basis.

Preferential creditors are paid in full before secured floating charge creditors. Any surplus funds after payment in full of preferential and secured debts is passed back to the company or held pending the company going into liquidation. The liquidator can then make a distribution to unsecured creditors, although instances of this happening are rare.

Liquidation and phoenixism

A liquidator will sell a company's assets to the best or only bidder. Liquidation prices are often a fraction of book value.

Often the only buyer is

• Another company set up by the director to carry on the business
• The directors.

This kind of ‘phoenixism’ is legitimate provided the liquidator has made genuine efforts to sell the assets at arms length and receives no better offer.

It should not be confused with director phoenixism where the directors sell an old company’s assets to a new company under their control at a gross undervalue. When HMRC has unpaid debts they may appoint a liquidator of the old company to investigate the transactions and effect a recovery under the provisions of the Insolvency Act 1986.

The proceeds of free assets (those not charged to a secured creditor) are used to pay the liquidator’s fees and costs of getting in the assets, the preferential creditors in full, then a dividend to non-preferential unsecured creditors. Following the Leyland Daf decision there is currently no provision for payment by a liquidator of other expenses incurred such as rates, taxes arising post liquidation contrary to the position in administration. A change of law is under consideration.

Company Administration

Once a company is in administration, no proceedings can be taken by any creditor for pre- or post-administration debts without the permission of the Administrator or the Court.

The purpose of an administration under the IA 1986 [as originally enacted] is to achieve one or more of

• The survival of the company or its undertaking
• The approval of a company voluntary arrangement
• The approval of a scheme of arrangement
• A more advantageous realisation of assets.

There is no mechanism for this administrator to distribute realisations, hence a need for an exit route such as CVA.

The objective of an administration under the 1986 Act as revised by Schedule 16 of the Enterprise Act 2002 is

• The rescue of the company as a going concern
• Achieving a better result for the company’s creditors as a whole than would be likely if the company were wound up (without first being in administration)
• Realising property in order to make a distribution to one or more secured or preferential creditors.

This administrator is obliged to give primacy to rescue measures and is able to distribute directly to creditors with the Court’s sanction.

Administrations traditionally have been very costly because of the heavy involvement of the IP and staff in running the company and were only really suitable for very large concerns. The changes introduced in 2002 are aimed at making entry into administration easier, faster and cheaper. They might not reduce ongoing costs.

The Insolvency Rules provide for the administrator to meet all costs and expenses (including taxes) before dividends are paid to creditors.

Scheme of Arrangement (Section 425 Companies Act 1985)

• A scheme of arrangement is another rescue procedure involving the active participation of the Court. Proposals are put to creditors in a general meeting. If supported by 75% or more by value they become binding upon all creditors.

Creditors can be bound in without their knowledge and there may be very strict time limits for claims after which dividends can be lost.

Company Voluntary Arrangement

Is there an alternative?

Yes, except for voluntary arrangements ( INS10161). All other potential rescue measures take control of business and its assets out of the owner’s hands. Voluntary arrangement leaves the debtor owner in control subject to supervision by the VA supervisor.