London | Frankfurt | Madrid | Milan | Rome

MODERN LAWYERSFOR CHANGING TIMES 'a City firm in a non-City location' - Legal 500

When a company becomes insolvent, or anticipates insolvency, there are mechanisms incorporating pre-package valuation of assets and negotiation with creditors in order to restructure debt which can ease the impact of insolvency and afford some certainty for shareholders and employees.

If, however, a company is forced to relinquish control to external administrators, receivers or liquidators, those individuals will have the power to reverse an array of transactions entered into prior to both the company becoming insolvent and during insolvency. This in turn can lead to scrutiny of directors’ conduct and potential sanction being brought against them.

Restructuring

Two primary means of restructuring debt and liabilities are: (1) Company Voluntary Agreements and; (2) Pre-Package Sales.

Company Voluntary Arrangements

A Company Voluntary Arrangement (CVA) is a formal agreement between creditors and a company which ensures the continuity of the business and avoids administration or liquidation. Instead, the company will agree to a single, periodic payment towards creditors, usually over a number of years.

When a company becomes insolvent, a CVA is available upon request to the creditor-appointed Insolvency Practitioner, who must make a determination as to the financial prospects of the business and whether it would survive under a CVA. A proposed repayment plan must be approved by both the equivalent of 50% of the shareholding value in the company, as well as the creditors who make up 75% of unsecured debt in the company.

The utility of a CVA in insolvency is to allow the restructuring of debt and temporarily shield the company from claims by unsecured creditors. The remaining creditors beyond the 75% threshold will also be bound to adhere to the agreement. A CVA also permits current directors to remain in control of the company and resume trading as normal.

It is important to note that a CVA will not prevent secured creditors from enforcing their claims.

Small company moratoriums

If a company qualifies as a small company under the UK Companies Act, it will be able to obtain a 28-day moratorium on claims while a CVA is being negotiated with creditors. In order to qualify, the company must have:

  • turnover no greater than £6.5m;
  • company assets that do not exceed £3.26m; and
  • no more than 50 employees within the previous financial year or 12 months prior to the filing of the moratorium.

A moratorium will afford some breathing space in order for the company to concentrate on restructuring its debt.

Creditor challenge to CVA validity

Although a creditor might fall within the 25% portion bound to accept the CVA, they may still challenge the terms of the Agreement within 28 days of its making on the basis of unfair prejudice or procedural irregularity.

Failure to adhere to terms of the CVA

If the company subsequently fails to keep up due payments under the CVA, it may be subject to compulsory liquidation by the creditors through application to the relevant court.

Pre-packs in administration

Where a company anticipates insolvency, it can avoid an onerous process of appointing an administration and surrender of control in order to restructure debt by arranging for a pre-pack of the company’s assets. This is done where a company has its assets professionally evaluated and designated for sale. The company’s shareholders and directors will usually buy back the company’s assets after reimbursement of the company’s creditors, and form a new company.

The benefits of a pre-package sale over a CVA is that the latter can entail payment plans that last several years. By contrast, a pre-package sale is a far quicker process that enables a fresh start. It also avoids the negative publicity of entering into a protracted administration process where the company directors surrender control.

Transactions in insolvency

Where a company has entered into transactions and then becomes insolvent, or continues to enter into transactions upon becoming insolvent, these can be subsequently reversed in order to maximise returns for a company’s creditors.

Antecedent transactions

Transactions entered into before a company becomes insolvent are referred to as antecedent transactions. Where a company enters into administration, voluntary or involuntary liquidation, these transactions can be reversed in order to recover expenditure made by the company. There are a range of antecedent transactions that can be subject to set aside up to two years prior to the point the company entered insolvency.

Transactions at undervalue

The “undervalue” in a transaction will arise where an asset is transferred to a third party in exchange for a considerably reduced amount relative to market value or for no value at all.

Preferential payments

The provision of cash or assets to certain creditors prior to insolvency may be considered preferential treatment, and company records will be reviewed up to six months prior to insolvency in order to identify such transfers, or, if a person affiliated with a director has been favoured, this period extends to two years. In any case, these transactions will be reversible if insolvency can be shown to have resulted from them.

Wrongful Trading

Where directors continue trading when insolvency has occurred, resulting in financial loss, the administrator or officer overseeing liquidation can pursue recovery of value lost against offending directors personally.

Misfeasance

Where during insolvency a director siphons money away from the company, either through high bonuses or misappropriating funds, these transactions are reversible by a subsequently appointed office holder in administration or insolvency

Contact our Restructuring and Insolvency Solicitors Mayfair and throughout London

Where company directors anticipate insolvency, it is highly advisable to seek the advice of an experienced Insolvency Solicitor for advice on debt restructuring and how best to negotiate with creditors. It is also paramount to have an understanding of how directors must conduct themselves when their company does in fact enter insolvency.

The Restructuring and Insolvency Solicitors at Lewis Nedas have served a wide range of clients with their financial affairs during difficult times, including directors in insolvency and stakeholders such as banks, sponsors and landlords. We have provided expert advice on salvaging company prospects, including reorganising and restructuring of debts.

For further information or to speak to our expert Restructuring and Insolvency Lawyers please contact us on 020 3811 6792 or complete our online enquiry form.

Accreditations
and Awards

legal 500 uk leading firm 2017 chambers leading firm 2017