Insolvency Law Corporate and Personal

Insolvency Law Corporate and Personal Fourth Edition Andrew R Keay LLB; MDiv; LLM; PhD; Barrister (England and Wales); Legal Practitioner (Aust) Professor of Corporate and Commercial Law Centre for Business Law and Practice School of Law University of Leeds Professorial Research Fellow Deakin Law School Deakin University, Australia, and Barrister, Kings Chambers Peter Walton LLB; PhD Professor of Insolvency Law Wolverhampton Law School University of Wolverhampton

Published by LexisNexis LexisNexis Regus Terrace Floor Castlemead Lower Castle Street Bristol BS1 3AG Whilst the publishers and the author have taken every care in preparing the material included in this work, any statements made as to the legal or other implications of particular transactions are made in good faith purely for general guidance and cannot be regarded as a substitute for professional advice. Consequently, no liability can be accepted for loss or expense incurred as a result of relying in particular circumstances on statements made in this work. RELX (UK) Limited, trading as LexisNexis 2017 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any way or by any means, including photocopying or recording, without the written permission of the copyright holder, application for which should be addressed to the publisher. Crown Copyright material is reproduced with kind permission of the Controller of Her Majesty s Stationery Office. British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library. ISBN 978 1 78473 309 4 Typeset by Letterpart Limited, Caterham on the Hill, Surrey CR3 5XL Printed in Great Britain by Hobbs the Printers Limited, Totton, Hampshire SO40 3WX

CONTENTS Preface to the First Edition Preface to the Fourth Edition Abbreviations Acknowledgements Table of Cases Table of Statutes Table of Statutory Instruments xxiii xxvii xxix xxxi xxxiii lxix lxxxi Part I Introduction Chapter 1 Introduction 3 1.1 The context 3 1.2 Historical background 7 General 7 Bankruptcy 7 Corporate insolvency 9 Modern developments 9 1.3 Terminology 12 1.4 The effects of insolvency 13 Chapter 2 The Meaning of Insolvency 15 2.1 Introduction 15 The tests for insolvency 16 Shortcomings of the tests for insolvency 16 What the legislation says 17 What the courts say about section 123 18 Cash flow insolvency 18 Balance sheet insolvency 19 Chapter 3 Purposes, Principles and Theory 21 3.1 Introduction 21 3.2 The purposes 22 3.3 Principles 22

vi Insolvency Law: Corporate and Personal 3.4 Theory 24 The creditors bargain theory 25 Communitarian theory 27 Multiple values approach 28 Other approaches 29 3.5 Conclusion 30 Chapter 4 The Administration of Insolvency Regimes 31 4.1 Introduction 31 4.2 The courts 31 4.3 The Insolvency Service 32 4.4 Official receivers 33 4.5 The Secretary of State for Business, Energy and Industrial Strategy 34 4.6 Qualified insolvency practitioners (office-holders) 35 4.7 Decision making 37 Chapter 5 Options for Insolvents and the Layout of the Book 43 5.1 Options for insolvents 43 5.2 Personal insolvency 44 Bankruptcy 44 Individual voluntary arrangement 44 5.3 Corporate insolvency 45 Liquidation 45 Receivership 45 Administration 45 Company voluntary arrangement 46 5.4 The layout of the book 46 Part I References 47 Part II Non-Terminal Insolvency Chapter 6 Receivership 55 6.1 Introduction 55 6.2 Types of security 56 6.3 Types of receiver 58 6.4 Appointment 60 Mode of appointment 60 Validity of appointment 61 Agency of receivers 62 Effect of appointment of an administrative receiver 63 6.5 Powers of receivers 63 Mechanics of power of sale 63 Actions against the debenture holder 64

Contents vii 6.6 Contractual liability of receivers 65 New contracts 65 Existing contracts 65 Repudiation of existing contracts 65 Contracts of employment 66 Other creditors 68 6.7 Duties of receivers at common law and in equity 68 6.8 Formalities of administrative receivership 71 Publicity of administrative receivership 71 Information gathering and imparting 71 6.9 Ending of administrative receivership 72 Effect of winding up 72 Distribution of proceeds 73 Termination 74 6.10 Availability of administrative receivership after the Enterprise Act 2002 74 Chapter 7 Administration 77 7.1 Introduction 77 Changes under the Enterprise Act 2002 78 Nature of administration 80 7.2 Appointment of administrator 81 Procedure and grounds for appointment under the old regime 81 Purpose of administration under the new regime 81 Procedure for appointment under the new regime 86 Appointment by the court 86 Appointment by a floating charge holder 90 Appointment by the company or its directors 91 7.3 Process of administration 96 Effect of administration 96 Moratorium on actions 97 Interim moratorium 98 Moratorium following administrator s appointment 99 Permission of the court 102 Formalities upon appointment 103 Administrator s proposals 104 7.4 Duties of an administrator 108 7.5 Powers of an administrator 113 Disposal of assets charged to, or belonging to, another 114 Disposal of assets without a creditors decision procedure 115 Pre-packs 118 Creditor disenfranchisement 121 Conflict of interest and duty or conflict of duty and duty? 122 Government intervention 126 Remuneration and expenses of the administrator 127

viii Insolvency Law: Corporate and Personal 7.6 Contractual liability in administration 128 Existing contracts 128 New contracts 130 Employment contracts 130 7.7 Ending administration 131 Distributions to creditors 131 Automatic end (paras 76 78) 133 Court ending on application of administrator (paras 79, 81 and 82) 134 Termination of administration where objective achieved (para 80) 135 Converting administration into creditors voluntary liquidation 135 Administration to dissolution 136 Chapter 8 Company Voluntary Arrangements 137 8.1 Introduction 137 What is a company voluntary arrangement? 138 8.2 Procedure 143 Procedure to approve a company voluntary arrangement 143 Procedure under Schedule A1 148 8.3 Transparency 151 8.4 Effect of approval 152 Creditors with no notice of the qualifying decision procedure 152 The unknown creditor 153 Future or contingent creditors 153 Other effects 155 8.5 Unfair prejudice or material irregularity 155 Unfair prejudice 155 Unfair prejudice and the football creditor rule 158 Material irregularity 161 8.6 Theoretical basis of voluntary arrangements 162 8.7 Duties of the nominee and supervisor 167 8.8 Variation of a voluntary arrangement 170 8.9 Termination of a voluntary arrangement 171 Chapter 9 Individual Voluntary Arrangements 175 9.1 Introduction 175 9.2 Procedure 178 Procedure where an interim order is made 179 Effect of the interim order 181 Nominee s report on debtor s proposal 182 Procedure where no interim order is made 182 Consideration of Debtor s proposal by Creditors 183 Effect of approval 184

Contents ix Unfair prejudice or material irregularity 185 9.3 Implementation and supervision of the IVA 187 9.4 Ending of the IVA 188 Chapter 10 Other Types of Arrangement 189 10.1 Introduction 189 10.2 Informal arrangements 191 The demise of the London Approach and the rise of the Distressed Debt Market 192 10.3 Formal arrangements for companies 194 Schemes of arrangement under Part 26 of the Companies Act 2006 194 10.4 Formal arrangements for individuals 196 Debt relief orders 196 County court administration orders 199 Enforcement restriction orders 201 Debt management schemes 202 Part II References 203 Part III Provisional Liquidation Chapter 11 Provisional Liquidation 209 11.1 Introduction 209 11.2 The applicant 210 Creditors 210 Contributories 211 The company 211 The Secretary of State for Business Energy and Industrial Strategy 211 11.3 The application 212 11.4 The basis for an appointment 212 11.5 The order 214 11.6 The effect of an appointment 214 11.7 The provisional liquidator 215 11.8 The termination of the appointment 216 Part III References 218 Part IV Winding Up Chapter 12 Introduction to Winding Up 221 12.1 The nature of winding up 221 12.2 The purposes of winding up 223 12.3 An overview of winding up 224

x Insolvency Law: Corporate and Personal Chapter 13 Creditors Voluntary Winding Up 227 13.1 Introduction 227 13.2 The procedure 229 No declaration of solvency 229 The members meeting and resolution 229 Informing the creditors and appointment of a liquidator 230 Liquidator decides the company is insolvent 234 After the appointment of the liquidator 235 Chapter 14 Compulsory Winding Up 237 14.1 Introduction 237 14.2 The basis for winding up 237 14.3 Petitioners for winding up 238 14.4 The hearing of the petition 240 14.5 Winding up unregistered companies 241 14.6 The making of a winding-up order 241 14.7 An order following voluntary winding up 242 14.8 Creditors petitions 244 The creditor as petitioner 244 Insolvency as a ground for winding up 245 Statutory demand 247 Unsatisfied execution 250 14.9 Injunction to restrain the presentation or the advertising of the petition 251 14.10 Winding-up procedure 253 Presenting the petition 253 Service of the petition 253 Giving notice of the petition 254 Substitution of creditors 254 The hearing 255 Disputed debt 257 Abuse of process 260 Creditor opposition to the petition 262 14.11 Stay of winding-up proceedings 263 Chapter 15 The Aftermath of the Advent of Winding Up 267 15.1 Introduction 267 15.2 On the company itself 267 The entity and powers of the company 267 Name 268 Ownership of property 268 Dispositions of property 269 Compulsory winding up 269 Effect of the making of a void disposition 277 The impact of the Human Rights Act 1998 277

Contents xi 15.3 On directors 278 Powers 278 Office 278 Responsibilities 279 15.4 On company contracts 279 15.5 On members 281 15.6 On legal proceedings 282 Proceedings commenced against the company 282 Compulsory winding up 282 Voluntary winding up 285 Proceedings on behalf of the company 286 15.7 On creditors 286 Chapter 16 The Players in a Liquidation 287 16.1 Introduction 287 16.2 The official receiver 287 16.3 The creditors and members (contributories) 288 16.4 The liquidation committee 289 Compulsory liquidation 289 Creditors voluntary liquidation 290 Position of committee members 291 Powers 291 16.5 The Insolvency Service 292 16.6 The Secretary of State for Business Energy and Industrial Strategy 292 Chapter 17 The Liquidator 295 17.1 Introduction 295 17.2 Appointment 295 The appointee 295 The method of appointment 296 17.3 Liquidator s position 297 17.4 Duties of liquidators 298 Fiduciary duties 299 Refraining from a conflict of duty and interest 300 A duty to act with impartiality 300 Duties of skill and care 300 Duty to exercise discretion 301 Specific duties 301 Publishing and filing notice of appointment 301 Providing statement of affairs and report 302 Settling a list of contributories 302 Retaining records, books and accounts 302 The collection of property 303 The investigation of the affairs of the company 303 The preserving of assets 304

xii Insolvency Law: Corporate and Personal The realisation of assets 304 Determining and discharging liabilities 305 17.5 Powers of the liquidator 307 Statutory powers 307 Compulsory winding up 307 Supplementary powers 309 Delegated powers 310 Voluntary winding up 310 17.6 Remuneration 310 17.7 The end of the appointment 312 Resignation 312 Removal 313 17.8 The supervision of liquidators 317 Court examination of the conduct of liquidators 318 Review of the acts or decisions of liquidators 318 Control of the court 319 Chapter 18 Dissolution 321 18.1 Introduction 321 18.2 The process 321 Compulsory winding up 321 Voluntary winding up 322 Early dissolutions 322 Administration to dissolution 323 18.3 The consequences of dissolution 323 Proceedings 323 Property 323 18.4 Restoration 324 Part IV References 325 Part V Bankruptcy Chapter 19 Introduction to Bankruptcy 329 19.1 Introduction 329 19.2 Outline of bankruptcy procedure 331 19.3 Who can be made bankrupt? 332 19.4 Who can apply or petition for bankruptcy? 334 Chapter 20 Debtor s Application 335 20.1 Introduction 335 Chapter 21 Creditor s Petition 339 21.1 Introduction 339

Contents xiii 21.2 The petition 340 Statutory demand 342 Expedited petition 343 Application to set aside a statutory demand 344 Unsatisfied execution 345 21.3 Procedure 345 Chapter 22 Effects of Bankruptcy 349 22.1 Introduction 349 22.2 Dispositions of property by the bankrupt after the application or petition 350 22.3 Loss of property 351 Reasonable replacement 352 After-acquired property 353 Income of the bankrupt 354 Pension rights 354 Bankrupt s home 355 22.4 Release from creditor harassment 359 22.5 Personal consequences 360 Criminal liability 361 Personal restrictions 362 Chapter 23 The Trustee in Bankruptcy 365 23.1 Introduction 365 23.2 Appointment of official receiver as first trustee 365 Replacement of official receiver as trustee by creditors 366 Formalities following appointment of trustee in place of official receiver 367 23.3 Administering the estate 368 Trustee s duties 368 Trustee s powers 370 Trustee s remuneration 371 Resignation, removal or vacation of office by the trustee 371 23.4 Distribution to creditors 372 23.5 Ending the administration of the bankruptcy 373 Chapter 24 Discharge 375 24.1 Introduction 375 24.2 Automatic discharge 375 24.3 Effect of discharge 376 24.4 Restrictions on the bankrupt after discharge 377 24.5 Effect of BRO or BRU 381 24.6 Annulment 383 Part V References 386

xiv Insolvency Law: Corporate and Personal Part VI International Insolvency Chapter 25 Cross-Border Insolvency 391 25.1 Introduction 391 25.2 Approaches to cross-border insolvencies 392 Territorial approach 392 Universal approach 392 Other approaches 393 25.3 Developments 393 25.4 The provision of judicial assistance 394 25.5 The common law 396 25.6 The Model Law 398 25.7 The Cross-Border Insolvency Regulations 2006 402 Introduction 402 Foreign Representative 405 Proceedings 405 Main proceedings 410 Non-main proceedings 410 Centre of main interests 411 Miscellaneous 414 25.8 The future 415 Chapter 26 European Insolvency Proceedings 417 26.1 Introduction 417 26.2 Brexit 418 26.3 Introduction and background to the EC Regulation on Insolvency Proceedings 2000 420 26.4 Definitions 423 26.5 Centre of main interests 426 26.6 Proceedings 433 Main proceedings 434 Secondary proceedings 434 Territorial proceedings 438 Insolvency-related proceedings 439 26.7 Conflict 440 26.8 Forum-shopping 441 26.9 Which law applies? 444 26.10 Recognition of insolvency proceedings 447 26.11 Creditor claims 449 26.12 Co-operation 449 26.13 Insolvency registers 449 26.14 Corporate groups 450 26.15 The Future 450 26.16 Summary 451 Part VI References 452

Contents xv Part VII Administration of Insolvent Estates Chapter 27 Investigations and Examinations 461 27.1 Introduction 461 27.2 Investigations 462 General 462 The official receiver 462 Compulsory winding up 463 Bankruptcy 464 Company liquidators 466 Trustees in bankruptcy 467 27.3 Public examinations 467 General 467 Pre-examination issues 469 The examination 471 27.4 Private examinations 473 Rationale for examinations 475 The function of examinations 476 The nature of examinations 477 The examinee 478 The extent of examinations 479 The examination 483 27.5 Conclusion 484 Chapter 28 Funding 485 28.1 Introduction 485 28.2 Legal proceedings 486 28.3 The options 487 Creditor indemnity 487 Fighting funds 488 Conditional fee agreements 488 28.4 Third party funding arrangements 489 28.5 Insurance 493 28.6 Conclusion 493 Chapter 29 Disclaimer 495 29.1 Introduction 495 29.2 Scope of the power 495 Introduction 495 The process 497 The effect of a disclaimer 499 Freehold land 500 Leasehold land 501 Contracts 504

xvi Insolvency Law: Corporate and Personal Chapter 30 Distribution of Property in Insolvent Estates 505 30.1 Introduction 505 30.2 The pari passu principle 505 30.3 Exceptions to pari passu 507 Set-off 507 Debt subordination 508 Liquidation, administration and bankruptcy expenses 509 Preferential creditors 509 Summary 510 30.4 The anti-deprivation principle 510 30.5 Distribution of the estate a matter of priorities 513 Liquidation 513 The expenses of winding up 514 Preferential debts 519 Unsecured debts 525 Post-liquidation interest on debts 527 Deferred debts 527 Administration 527 Bankruptcy 528 Costs and expenses of bankruptcy (section 328(2), rule 10.149) 528 Pre-preferential debts 529 Preferential debts (section 328(1)) 529 General body of ordinary unsecured creditors (section 328(3)) 529 Post-bankruptcy interest on debts (section 328(4)) 530 Deferred debts 530 Surplus 530 30.6 Statutory subrogation 531 30.7 Payment of dividends 532 General 532 Procedure for payment 533 Final dividend 535 Part VII References 536 Part VIII Creditors Chapter 31 Secured Creditors and Guarantees 541 31.1 Introduction 541 31.2 Liquidation 544 31.3 Bankruptcy 545 31.4 Administrative receivership 546 31.5 Administration 546 31.6 Voluntary arrangements 548

Contents xvii Chapter 32 Retention of Title 551 32.1 Introduction 551 32.2 Liquidation 554 32.3 Administrative receivership 554 32.4 Bankruptcy 554 32.5 Administration 554 32.6 Voluntary arrangements 555 Chapter 33 Execution Creditors and Landlords 557 33.1 Introduction 557 33.2 Execution creditors 558 Third party debt orders 558 Charging orders 560 Writ of control 560 33.3 Execution creditors and insolvent debtors 562 Administrative receivership 562 Compulsory liquidation 564 Voluntary liquidation 565 Bankruptcy 566 Voluntary arrangements 567 Administration 568 33.4 Rights of a landlord 570 CRAR 570 Forfeiture of the lease 571 33.5 Landlords and insolvent tenants 572 Bankruptcy 572 Voluntary arrangements 574 Compulsory liquidation 574 Voluntary liquidation 576 Administrative receivership 577 Administration 577 Chapter 34 Preferential Creditors 579 34.1 Introduction 579 34.2 Liquidation 579 34.3 Bankruptcy 580 34.4 Administrative receivership 580 34.5 Administration 580 34.6 Voluntary arrangements 581 Chapter 35 Set-Off 583 35.1 Introduction 583 35.2 Insolvency set-off in bankruptcy, administration and liquidation 584

xviii Insolvency Law: Corporate and Personal 35.3 Equitable or contractual set-off applicable in receivership 588 35.4 Set-off in voluntary arrangements 589 Chapter 36 Proving Debts 591 36.1 Introduction 591 36.2 Liquidation 592 36.3 Bankruptcy 595 Part VIII References 596 Part IX Swelling the Asset Pool Chapter 37 General Principles and Concepts 601 37.1 Introduction 601 37.2 The legislative framework 603 37.3 Applicable concepts 604 The relevant time 604 Insolvent 605 Connected persons and associates 606 Assignment 607 Chapter 38 Transactions at an Undervalue 609 38.1 Introduction 609 38.2 Conditions for adjustment 610 38.3 The transaction 611 38.4 Consideration 613 38.5 Value 616 38.6 Defences 619 38.7 Court orders 620 38.8 Protecting third persons 622 38.9 Limitation of actions 622 Chapter 39 Preferences 623 39.1 Introduction 623 39.2 The elements to be established for adjustment 624 Improvement in the position of the creditor or guarantor 626 Secured creditors and granting security 626 Influenced by a desire 627 Re MC Bacon Ltd 627 The problems with desire 628 After Re MC Bacon Ltd 630 Commercial pressure 631 39.3 Court orders 633 39.4 Limitation of actions 633

Contents xix Chapter 40 Transactions Defrauding Creditors 635 40.1 Introduction 635 40.2 Transactions at an undervalue 637 40.3 The purpose 638 40.4 Fraud and inferences 641 40.5 Orders 642 40.6 Limitation period 644 Chapter 41 Invalidation of Floating Charges 645 41.1 Introduction 645 41.2 The relevant time 646 41.3 Void charges 646 41.4 Exceptions 647 41.5 The effect of invalidation 649 Chapter 42 Extortionate Credit Transactions 651 42.1 Background to the provision 651 42.2 The scope of the provisions 651 42.3 Extortionate: the critical element 652 42.4 Court orders 653 Chapter 43 Wrongful Trading 655 43.1 Background 655 43.2 The section 656 43.3 Elements needed for liability 657 43.4 The scope of the provision 657 43.5 Defences 660 43.6 Orders 663 43.7 Limitation of action 664 43.8 Some reflections 664 Chapter 44 Fraudulent Trading 667 44.1 Introduction 667 44.2 Knowingly 669 44.3 Intent to defraud 669 44.4 Fraudulent purpose 672 44.5 Bringing proceedings 673 44.6 Court orders 673 44.7 The proceeds 674 Chapter 45 Breach of Directors Duties 677 45.1 Introduction 677

xx Insolvency Law: Corporate and Personal 45.2 Directors duties 678 45.3 Duty to act for proper purposes 680 45.4 Duty to promote the success of the company 681 45.5 Duty to exercise independent judgment 682 45.6 Duties of care, skill and diligence 682 45.7 Duty to avoid conflicts of interest 684 45.8 Duty not to accept benefits from third parties 685 45.9 Duty to declare interest in proposed transaction or arrangement 685 45.10 Duty to consider creditors 685 45.11 Disqualification 688 45.12 Disadvantages with actions 688 Part IX References 690 Part X Misconduct Chapter 46 Misfeasance 697 46.1 Introduction 697 46.2 The applicant 698 46.3 The respondent 699 46.4 The conduct 700 46.5 Orders 700 46.6 Relief for respondents 701 Chapter 47 Disqualification of Directors 703 47.1 Introduction 703 47.2 The nature of proceedings 704 47.3 The bases for orders 705 47.4 Directors of insolvent companies found to be unfit 706 General 706 The length of disqualification 708 47.5 Procedure 709 47.6 Leave to continue 710 Chapter 48 Offences 711 48.1 Introduction 711 48.2 Procedure 712 48.3 Offences in liquidations 713 Fraud in anticipation of winding up 713 Transactions in fraud of creditors 714 Misconduct in the course of winding up 715 Falsification of company books 715 Material omissions from statement relating to company s affairs 715

Contents xxi Fraudulent representations to creditors 716 Restriction on re-use of company name 716 48.4 Offences in bankruptcy 717 Failure to disclose or inform of disposal of property 718 Concealment of property 718 Improper dealings with records 719 False statements 719 Fraudulent disposal of property 719 Absconding with property 719 Dealing with property obtained on credit 719 Obtaining credit 720 Engaging in business 720 48.5 Offences in other regimes 720 48.6 The types of proceedings 720 Part X References 721 Index 723