Answer ... (a) Debtor
Generally, a debtor’s contractual obligations remain enforceable upon the commencement of an insolvency proceeding (subject to limited exceptions such as employment contracts in a compulsory liquidation), though a moratorium may apply as further detailed at question 4.4. However, a breach of obligations arising prior to the proceeding will give rise only to an unsecured claim (unless the insolvency officeholder has taken action to ‘adopt’ the contract for the benefit of the estate). New obligations that the officeholder causes the company to incur will typically rank as expenses of the proceeding.
(b) Directors of the debtor
Directors’ powers will generally cease in a liquidation or an administration (though an officeholder may request their assistance). In a CVA, the directors remain in control (the role of the nominee/supervisor being limited to oversight of the CVA). As noted above, it is the directors who prepare and submit the CVA proposals to the nominee for consideration.
(c) Shareholders of the debtor
The shareholders of a debtor have limited involvement in most insolvency proceedings, except in the case of a voluntary liquidation, which is commenced by a shareholders’ resolution.
In the case of a CVA, the shareholders of the debtor may vote on the proposals document. Though the proposal can take effect if it has been approved by the creditors alone, a shareholder of the debtor can apply to the court, which has the discretion to order that the decision of the company’s shareholders should prevail (although this is extremely rare).
(d) Secured creditors
Secured creditors are unable to vote on a company voluntary arrangement (save to the extent that their debt is unsecured) and secured debts cannot be compromised by a CVA.
In a creditors’ voluntary liquidation, creditors are invited to nominate a liquidator, while in a compulsory liquidation a liquidator may be appointed by a company’s creditors (which may occur at the invitation of the Official Receiver or at the instigation of a creditor representing 25% in value of the debtor’s creditors). A creditor will be entitled to vote only the unsecured or under-secured element of its debt.
In most circumstances, a majority in value of a company’s creditors must vote in favour of an administrator’s proposals, and the creditors receive reports from the administrators detailing the progress of the administrator and a final progress report. An administrator must also invite creditors to form a creditors’ committee. Any person that has proved for a debt which is not fully secured is eligible to be a member of such committee.
(e) Unsecured creditors
A CVA proposal will be implemented if it is approved by at least 75% by value of the company’s unsecured creditors (at least 50% by value of which must be unconnected with the company) – see question 4.1. The proposal will be binding on all unsecured creditors, even if they are subject to different treatment under the CVA (subject to their rights to appeal on the grounds of fairness).See paragraph (d) above for the role of creditors generally in a liquidation or an administration.
A compulsory liquidation automatically terminates employees’ service contracts. Otherwise, the entry of a company into administration, voluntary liquidation or the CVA process has no immediate direct impact on employees. Certain employment-related claims rank as preferential debts in liquidation or administration. Administrators must decide whether they wish to adopt existing employment contracts within 14 days of the commencement of an administration and, once a contract is adopted, priority is given for all ongoing wages which are paid as expenses of the administration.
(g) Pension creditors
Unpaid contributions to occupational pension schemes (within certain limits) rank as preferential debts in a liquidation or administration.
Otherwise, any deficit on a defined benefit pension scheme – and any financial support direction or contribution notice issued by the Pensions Regulator exercising moral hazard powers – will constitute an ordinary unsecured claim in an administration or liquidation. The claim will be valued on a full buy-out basis, meaning that pension creditors may often have a material influence in the process.
The occurrence of an administration, liquidation or CVA will constitute a ‘qualifying insolvency event’ in respect of a pension scheme, triggering an ‘assessment period’ during which the Pension Protection Fund (PPF) will determine whether it should take responsibility for it. If so, and pending this determination, the PPF is entitled to stand in the shoes of the pension trustees and exercise creditors’ rights on behalf of the pension scheme.
(h) Insolvency officeholder
Insolvency officeholders have the responsibilities described in question 4.5.
In a compulsory liquidation, the court will schedule one or more hearings following presentation of a winding-up petition and a judge will decide whether it is appropriate to make a winding-up order. An administration can also be commenced through a court order – see question 4.2.
The court generally takes a supervisory role in English insolvency proceedings. Insolvency officeholders have duties to report to the court and the court may provide directions to the insolvency officeholder upon request. Certain actions that may be taken by insolvency officeholders such as distributions to unsecured creditors in an administration require prior approval by the court. An administrator or liquidator may apply to court to bring claims for wrongful or fraudulent trading against directors, or to seek to set aside antecedent transactions. Finally, a creditor or member of the company may apply to court to challenge the insolvency officeholder’s conduct (eg, decisions on a proof of debt).
A court has no supervisory role with respect to a CVA unless a creditor elects to bring a challenge in the 28-day period following approval.