Recovery options for insolvent companies

Graph with File Cabinet & Trash Can

By Daniel Benson Kaaya

Insolvency of a company is a culmination of many factors. These factors may be internal or external, and include insufficient liquidity, value chain dependency, management conflicts, excessive expenditure, competition, impractical business ventures, inadequate resources to cover the costs of making the business venture, government policy, political instability, economic crisis and recurrent operating losses, among others.

Charles A. O’Reilly III and Michael L. Tushman, in their book, Lead and Disrupt, argue that companies don’t generally fail because of competition; rather, it’s out-of-touch leadership that kills them. Leaders of such companies are rigid in one way or another—unable or unwilling to sense new opportunities and to reconfigure the firm’s assets in ways that permit the company to continue to survive and prosper.

During this period of insolvency, the company has several recovery options, notably administration, company voluntary arrangement and sometimes pre-packs. When a company opts for either recovery option, the management of the company is entrusted to an authorised insolvency practitioner—a person who holds an authorisation granted under Section 9 of the Insolvency Act, 2015. A person acts as an insolvency practitioner in relation to a company if the person acts as—the liquidator, provisional liquidator, administrator of the company, a supervisor of a voluntary arrangement approved under Part VIII, or a supervisor of a voluntary arrangement approved under Part IX.

The rationale behind recovery options is to enable the company to carry out business as a going concern. The going principle is the assumption that an entity will remain in business for the foreseeable future. This means that a company has resources needed to continue to operate indefinitely until it provides evidence to the contrary—also referred to a company’s ability to make enough profits to stay afloat or avoid bankruptcy.

Administration is an insolvency procedure by which a company is placed under the control or management of an insolvency practitioner (administrator) to enable realisation of the statutory objectives. The objectives of the administration of a company are (a) to maintain the company as a going concern; (b) to achieve a better outcome for the company’s creditors as a whole than would likely to be the case if the company were liquidated (without first being under administration) and; (c) to realise the property of the company in order to make a distribution to one or more secured or preferential creditors. The Administrator must perform these functions in the interest of the company’s creditors as a whole. A company enters administration when the appointment of an administrator takes effect. The process of administration is set out in Division Part VIII, Division 8 of the Insolvency Act, 2015.

A person may be appointed as administrator of a company by administration order of the Court in accordance with Division 3; by the holder of a floating charge under section 534; or by the company or its directors under section 541.

In effect, the administration procedure is designed to hold a business together while plans are formed to put in place a financial restructuring to rescue the company as a going concern, if possible. If the business cannot reasonably be saved, the second objective is for the administrator to perform his functions with the aim of achieving a better return for creditors than would be achieved in liquidation (House of Commons Library Briefing Paper, CBP04915, 12th April 2016).

In summary the effects of an administration order are; (a) the company cannot be put to liquidation; (b) there’s a moratorium on the rights of creditors—which prevents creditors, unless they have the consent of the administrator or the permission of the court, from enforcing security, putting in execution, distaining on the company’s goods.

Additionally, no steps may be taken to repossess goods in the company’s possession under any hire-purchase agreement, conditional sale agreement, chattel leasing agreement or retention of title agreement except with consent or permission; (c) the administrator takes control of all the company’s assets—should act in the best interest of the company – an administrator has wide powers to manage business and property of the company, including the power to bring and defend legal proceedings, sell assets and borrow money and directors still continue in office, but their powers are suspended—the administrators have the power to remove and replace directors.

The process of administration ends automatically at the end of twelve months from and including the date on which it took effect. Despite this provision on the application of an administrator, the Court may, by order extend the administrator’s term of office for a specified period; and an administrator’s term of office may be extended by consent for a specified period not exceeding six months.

Company Voluntary Arrangement, (CVA), is a procedure that enables a company to put a proposal to its creditors for a composition in satisfaction of its debts or scheme of arrangement of its affairs. Section 625 (1) illustrates what CVA entails – that the directors of a company may make a proposal under Division 1 of Part IX to the company and to its creditors for a voluntary arrangement under which the company enters into a composition in satisfaction of its debts or a scheme for arranging its financial affairs. Composition refers to an agreement under which creditors agree to accept certain sum of money in settlement of debts due to them. CVA involves delayed or reduced payments of debt, capital restructuring or an orderly disposal of assets.

A proposal under Division 1 of Part IX may also be made (a) if the company is under administration—by the administrator; or (b) if the company is in liquidation—by the liquidator.

In making such proposals, the directors shall provide for the appointment of a person to supervise the implementation of the voluntary arrangement. Only an authorised insolvency practitioner may be appointed to supervise a voluntary arrangement.

Despite administration, the directors remain in charge of the management of the company during the CVA process; a provisional supervisor/supervisor is responsible in assisting the directors with the development of the proposal and the subsequent implementation of the CVA. A provisional supervisor is a supervisor of the arrangement before approval.

The procedure, if provisional supervisor is not the liquidator or administrator, is that the provisional supervisor shall, within thirty days (or within such extended period as the Court may allow) after that supervisor is given notice of the proposal, submit a report to the Court stating (a) whether, in that supervisor’s opinion, the proposal has a reasonable prospect of being approved and implemented; (b) whether, in that supervisor’s opinion, meetings of the company and of the company’s creditors should be convened to consider the proposal; and (c) if that supervisor believes that those meetings should be convened—the date on which, and the time and place at which, it is proposed to hold the meetings.

A directors’ proposal (with or without modifications) takes effect as a voluntary arrangement by the company on the day after the date on which it is approved by the Court by order made under Section 629 (7) (a) or on such later date as may be specified in the order.

On taking effect, the CVA binds every member of the company, every person (including a secured creditor and a preferential creditor) who was entitled to vote at the meetings (whether or not he was present or represented), or would have been entitled to vote if they had received notice of it as if he were a party to the CVA.

The following persons may make an application to the Court for an order under Section 631 – (a) one who was entitled to vote at the meeting of the company or the meeting of its creditors; (b) a person who would have been so entitled if the person had had notice of the relevant meeting; (c) the provisional supervisor or, if the proposal has taken effect as a voluntary arrangement, the supervisor of the arrangement; (d) if the company is in liquidation or is under administration—the liquidator or administrator.

This application is made on the grounds that a material irregularity has occurred at or in relation to either of the meetings, or that the approved voluntary arrangement detrimentally affects the interests of a creditor, member or contributory of the company. ^



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