England and Wales*
A look at corporate, personal and, where relevant, partnership insolvency proceedings in England and Wales, with a brief description to explain key features, as part of our Dictionary of Insolvency Terms in EU Member States. In particular, we highlight who controls the procedure and whether it is likely to be accompanied by a moratorium to prevent enforcement.
Scheme of arrangement
- Derives from company as opposed to insolvency legislation, and can be used for the solvent reorganisation of a group structure as well as insolvent restructuring.
- Can be proposed by both a company and a limited liability partnership (either by the directors or members or by an administrator or liquidator if the entity is in an insolvency process). The procedure is broadly the same for each.
- The court convenes meetings of members and creditors to consider a proposed compromise that must be approved by a majority in number and at least 75% in value of each class of creditors and members voting on the scheme.
- A scheme may propose only to affect the rights of some or all of the debtor’s creditors. As long as the statutory voting thresholds are met, schemes can compromise or write off the claims of secured creditors without their consent.
- Increasingly being used by both UK-based and overseas incorporated companies (that need to establish a sufficient connection with the English jurisdiction in order to implement a scheme of arrangement) in the leveraged buy-out market to write off or exchange debt for equity.
- Schemes do not automatically provide a stay against actions and proceedings. However, in rare cases, the court has granted a stay to enable a scheme to be pursued. In other cases, the scheme may be preceded by a standstill agreement and/or a lock-up agreement where (usually in exchange for a fee) creditors will commit, in advance, to vote to approve the proposed scheme. Where the protection of a stay is imperative, the company may first enter administration (which brings an automatic stay) and the scheme would then be proposed by the administrators.
- Restructuring plan A new process introduced in 2020, also deriving from company legislation, this court supervised restructuring process is largely modelled on schemes of arrangement but with the addition of a cross-class cram-down. The restructuring plan can be used with or without the protection of the new moratorium process introduced at the same time.
- The restructuring plan process can be used only by companies and limited liability partnerships which have encountered, or are likely to encounter, financial difficulties that are affecting, or will or may affect, their ability to carry on business as a going concern. The process is commenced by an application to Court which can be made by the company, its debtors, creditors, shareholders, administrators or liquidators.
- Like the scheme of arrangement, a restructuring plan may affect the rights of some or all of the company’s creditors. It can also compromise or write off secured debt.
- In order to implement a restructuring plan, a proposal must be made to the relevant creditors and/or members. Meetings of the creditors or members are then convened by the Court in classes, at which the proposal must be approved by 75% in value of creditors or members in each class who vote, subject to the cross-class cram-down mechanic. Following the voting, a further Court hearing is held at which the Court considers whether to sanction the plan and whether to apply the cross-class cram-down if applicable. The cross-class cram-down allows a class or classes of creditors or members which do not vote in favour of the plan to be bound if the Court is satisfied that:
- at least one class of creditors, or members, who would receive a payment, or have a genuine economic interest in the company, have voted in favour; and
- the dissenting creditors, or members, would not be any worse off under the plan than they would have been in the event of whatever the court considers would be most likely to occur in relation to the company should the plan be rejected;
and the Court is prepared to sanction the plan.
- One of the main rescue procedures available for insolvent companies and all types of insolvent partnership in England and Wales, designed to provide breathing space so that the debtor can be rescued or reorganised or, failing that, its assets realised for the benefit of its creditors.
- An administrator can be appointed either by court order on application of the debtor’s directors/members or any creditor or administration may be commenced more swiftly without a court hearing in some circumstances by the filing of documents at court by the insolvent debtor itself, its directors/members or a creditor who is a qualifying floating charge holder.
- The debtor’s management is replaced by an administrator who must be an independent, licensed insolvency practitioner. An administrator has full powers to run and manage the company or partnership, including a power to borrow money and grant security over the debtor’s assets. Regardless of who appointed him, the administrator owes their duties to the debtor’s creditors as a whole.
- On enforcement, the only deduction to be made from fixed charge realisations is the cost of realising the asset. However, legislation provides that the costs and expenses of the insolvency officeholder, sums due to preferential creditors and also a percentage of realisations that are compulsorily ring-fenced for unsecured creditors must be paid in priority to any sums due to a floating charge holder.
- Administration provides for a stay on all action against the debtor including litigation against the debtor and the enforcement of security and can be used to facilitate (controversially in some cases) pre-packaged sales of the company’s or partnership’s business. Despite the stay, an administrator has no power to sell assets which are subject to fixed charge security without first obtaining the permission of the charge holder or the court.
- Administration lasts for one year but can be extended initially with creditors’ consent for a further year and afterwards for a period fixed by order of the court. The moratorium on creditor action remains in place for the duration of the process.
Compulsory liquidation/Compulsory winding up/Winding up by the court
- A terminal insolvency process commenced by court order against a company or all types of partnerships in England and Wales, usually at the instigation of an unpaid creditor.
- It is commenced by petition filed by the entity itself, its directors / members, one or more creditors or insolvency office holders. The presentation of a petition does not operate as an automatic stay of proceedings against the debtor. However, dispositions made by a debtor after the presentation of a petition will be void if a winding-up order is subsequently made.
- If a winding-up order is made, a licensed insolvency practitioner is appointed to act as liquidator and the powers of the company’s directors/members of a limited liability partnership/partners cease. It is unusual for a company or partnership to trade in liquidation. Instead, the liquidator’s role is to realise the debtor’s assets and distribute the proceeds to creditors.
- Proceeds are distributed, broadly, first to the secured creditors and then the unsecured creditors receive the remainder according to the principle of pari passu (in proportion to the amount of debt owed to them when compared with the total amount of unsecured debt of the company). Once all distributions have been made, the debtor will be dissolved.
- Compulsory liquidation brings a stay on court proceedings against the debtor, but it does not prevent secured creditors from enforcing their security.
- On enforcement, the only deduction to be made from fixed charge realisations is the cost of realising the asset. However, legislation provides that the costs and expenses of the insolvency officeholder, sums due to preferential creditors and also a percentage of realisations that are compulsorily ring-fenced for unsecured creditors must be paid in priority to any sums due to a floating charge holder. A liquidator owes their duties to the creditors of the company as a whole and must act in the interests of all creditors.
Creditors voluntary liquidation/ Creditors voluntary winding up
- A terminal process commenced by resolution of the company’s shareholders or for limited liability partnerships by a decision of its members.
- A licensed insolvency practitioner is appointed to act as liquidator and powers of the directors/members cease. It is unusual for a company or limited liability partnership to trade in liquidation. Instead, the liquidator’s role is to realise the debtor’s assets and distribute the proceeds to creditors. The liquidator owes their duty to the creditors as a whole.
- Once all distributions have been made, the company or limited liability partnership will be dissolved.
- There is no automatic stay on actions against the company or limited liability partnership but on application the court may grant such a stay either generally or in relation to specific claims. Such court orders are rare and there is usually nothing to prevent secured creditors enforcing their security.
- A director led process also introduced in 2020 which leaves the directors in situ to trade the company (or the members to trade a limited liability partnership) with an insolvency practitioner acting in the role of "monitor" overseeing the company’s affairs. The monitor supervises the moratorium and must be, and remain of, the view that a rescue of the company will be possible. The directors therefore remain in control of the company and the aim is to allow companies time to formulate a turnaround plan with a breathing space from creditor action.
- Companies are eligible to use the moratorium if the directors state that the company is, or is likely to become, unable to pay its debts and the monitor is of the view that it is likely a moratorium would result in the rescue of the company as a going concern. Companies already subject to an insolvency procedure, and those that have been in a moratorium, CVA or administration in the previous 12 months are excluded from using the process. Certain companies, including insurance companies and banks, are automatically excluded.
- There are two ways a company may enter moratorium:
- by the directors filing relevant documents at court (the out-of-court process); or
- by the directors making an application to court (the in-court process).
The in-court process is only required where there is an outstanding winding up petition or the company is incorporated overseas.
- The initial period for the moratorium will be 20 business days but this is capable of being extended or terminated early. An initial 20 business day extension is available without creditor/Court consent, so many moratoria may last 40 business days. Further extensions are available with the consent of creditors or the permission of the court.
- During the moratorium period:
- the day to day running of the business of the debtor company remains with the directors but under the supervision of a monitor (an insolvency practitioner) and with the monitor’s consent required before the directors can undertake certain transactions;
- creditors and lenders will not be able to take enforcement action against the debtor company (including enforcement of security) for pre moratorium debts; and
- landlords cannot exercise rights of forfeiture.
- The company must continue to pay certain of its debts during the moratorium. These include amounts due for new supplies made during the moratorium, rent in respect of a period during the moratorium, wages and salary, and amounts due under financial contracts, including loan agreements. These amounts must continue to be paid or the moratorium will have to end. As amounts due to lenders during the moratorium are among those which must be paid lenders have a large measure of control over the moratorium and it is expected that moratoria will generally be instigated with lender support/consent.
- Certain debts, largely those incurred during the moratorium, have priority status in an insolvency process which follows within 12 weeks of the end of the moratorium.
Company voluntary arrangement (CVA)
- Allows a solvent or insolvent company in England or Wales to propose a compromise with its creditors which, if accepted by 75% of creditors who participate in the decision whether or not to approve the proposal, is binding on all of the debtor’s unsecured creditors (unless more than 50% of unconnected creditors vote against the proposal). It is therefore commonly used to cramdown dissenting creditors.
- A CVA cannot affect the rights of secured or preferential creditors without their consent.
- Unless it is proposed by a debtor that is already in administration, there is no automatic stay of actions against the debtor. The directors may apply for a 28-day moratorium in the case of a "small" company (one of the criteria being that it has fewer than 50 employees). This will stay creditors’ actions for the period during which the CVA proposals are circulated among creditors and until creditors decide whether to accept or reject a proposal. During this period, no steps may be taken by secured creditors to trigger a default nor to enforce security.
- A CVA can be challenged within a 28-day period by dissenting creditors on the basis that it is unfairly prejudicial or that there has been a material irregularity.
Partnership voluntary arrangement (PVA)
- Allows all forms of partnership in England and Wales to propose a compromise with their creditors that, if accepted by 75% of creditors who participate in the decision whether or not to approve the proposal, is binding on all of the partnership’s unsecured creditors.
- A PVA cannot affect the rights of secured creditors without their consent.
Individual voluntary arrangement (IVA)
- An IVA is a composition in satisfaction of a natural person’s debts or a scheme of arrangement of their affairs in England or Wales.
- Usually proposed by debtors to avoid bankruptcy. If the debtor requires protection from their unsecured creditors, they can first apply for an interim order that stays actions of unsecured creditors during the period when proposals for the IVA are circulated and until creditors have decided whether to accept or reject the debtor’s proposals.
- An IVA cannot affect the rights of secured creditors without their consent.
- The proposal takes effect if approved by 75% in value of creditors who elect to participate in the decision (unless more than 50% (in total value) of creditors who are not associated with the debtor vote against the proposal).
- The agreement sets out how creditors will be paid and normally provides for the debtor to make monthly contributions from their income for three to five years. At the end of an IVA, a debtor will be released from their remaining unsecured debts in accordance with the terms of the IVA. If a debtor fails to adhere to the payment plan, a creditor may petition for the debtor’s bankruptcy.
County Court Administration Order/Composition Order
- If a debtor owes less than GBP5,000 to at least two creditors pursuant to a county court or High Court judgment, they can apply to court for an administration order. The court then decides how much of the debt the debtor must repay and sets the level and duration of monthly repayments. The court will collect one monthly payment from the debtor and divide this payment between their creditors.
- Creditors listed on the administration order cannot take any further action against the debtor without the court’s permission.
Debt Management Plan
- A non-formal and unregulated way for a debtor to deal with their debts.
- There is no court involvement and no supervision by a licensed insolvency practitioner. They tend to be a written agreement between a debtor and their creditors (or some of them) in relation to the debts.
- When the plan is in place, there is no moratorium and there is nothing (beyond the contractual provisions) to stop a creditor from issuing proceedings against the debtor.
Debt relief order (DRO)
- A procedure available to financially distressed natural persons in England and Wales with very few assets and low income.
- The maximum amount of debt that can be covered by such an order is GBP20,000. The maximum value of a person’s assets in order to be eligible for a debt relief order is GBP1,000 and they must have a disposable monthly income of less than GBP50.
- A debt relief order provides a debtor with a year’s protection from creditors taking steps to enforce their debts without court permission. At the end of a year, the debtor is discharged in respect of those debts.
- A DRO does not lead to realisation or distribution of assets.
- Introduced in May 2021 to incentivise natural persons to access debt advice, the breathing space moratorium pauses enforcement action and freezes charges, fees and certain interest in relation to certain unsecured debts. The policy aim of the breathing space moratorium is to reduce stress caused by problem debt and to allow individuals to reach sustainable debt solutions.
- Breathing space moratoria can only be commenced by seeking advice from a debt adviser. The adviser must conclude that the debtor satisfies the eligibility criteria, is unable to pay some of their debt as it falls due and that a moratorium would be appropriate. If the adviser reaches such a conclusion, they notify the Insolvency Service to enter the breathing space moratorium on the relevant register and to notify creditors.
- To be eligible, the debtor must:
- be an individual;
- owe a qualifying debt to a creditor;
- live or usually reside in England or Wales;
- not have a debt relief order, an individual voluntary arrangement, an interim order, or be an undischarged bankrupt at the time they apply; and
- not already have a breathing space or have had a standard breathing space in the last 12 months at the time they apply.
- The breathing space moratorium is not a complete payment holiday and the debtor is under an obligation to maintain certain ongoing liabilities such as mortgage, taxes and utility bills as they fall due.
- The breathing space moratorium lasts for a maximum of 60 days, but can be cancelled earlier by the debt advice provider if (i) the debtor fails to comply with their obligations; (ii) a debt solution has been implemented in respect of the relevant debts; or (iii) the provider has not been able to contact the debtor.
- In addition to the standard breathing space moratorium, a mental health crisis breathing space is also available in certain circumstances.
- In England and Wales, when a natural person is unable to pay their debts, one or more of their creditors (owed GBP5,000 or more) may petition the court for a bankruptcy order to be made against him. Alternatively, the debtor may himself apply for such an order, usually online. The same procedure applies regardless of whether the debtor was in business or not.
- Statute provides that, on a bankruptcy order being made, almost all of the debtor’s assets vest automatically in either the Official
Receiver or a Trustee in Bankruptcy. Their role is to realise the debtor’s assets for distribution, pari passu, among their creditors.
The tools of the debtor’s trade and items needed to fulfil their basic domestic needs are excluded from enforcement action.
- Creditors are obliged to accept their distribution and, once discharged from bankruptcy, a debtor has no further liability for their bankruptcy debts.
- The Official Receiver/Trustee in Bankruptcy will continue to manage the debtor’s bankrupt estate even after they have been discharged from bankruptcy (usually a year after the bankruptcy order is made).
- A bankruptcy order does not prevent secured creditors from enforcing security. A secured creditor may also prove in the bankruptcy for any shortfall.
- An administrative receiver may be appointed out of court to a company or an LLP in England and Wales by a creditor who holds floating charge security over the whole or substantially the whole of the company’s assets created by a charge that pre-dates 15 September 2003 (and in other very limited circumstances).
- The directors’ powers cease on the appointment of an administrative receiver.
- An administrative receiver must be a licensed insolvency practitioner. The administrative receiver’s role is to realise the secured assets in order to repay the debt due to the secured creditor. An administrative receiver has the power to run and dispose of the business of any company over which they may be appointed. An administrative receiver can sell assets by private sale. The administrative receiver owes their duties primarily to the secured creditor who appointed them.
- Following changes in the law, administrative receivership is now very rare.
Receiver/LPA Receiver/Fixed Charge Receiver
- A secured creditor who holds fixed charge security over assets owned by a company, all forms of partnership or a natural person in England or Wales can appoint a receiver out of court provided that the charge has become enforceable.
- The receiver’s powers are limited to the assets over which they have been appointed. They will usually either sell them to repay
the debt due to the secured creditor (private sale is permissible) or receive income from income-generating assets, similarly
to discharge the debt due to the secured creditor. Any surplus after the receiver’s fees have been paid and the secured debt
discharged will be returned to the debtor.
- The receiver’s primary duty is to the appointing charge holder, but they owe a residual duty to the other creditors and the debtor. There is no requirement for a receiver to be a licensed insolvency practitioner.
Mortgagee possession/ Chargeholder’s possession
- A creditor who holds security over the assets of a company, all forms of partnership or a natural person in England or Wales may take possession of the secured asset in order to sell or lease it to repay sums due.
- A court order is required before taking possession of a natural person’s home, but otherwise court proceedings are not essential. Instead, the secured creditor may simply take physical possession of the charged property.
EU Directive Implementation
The EU Directive on Restructuring and Insolvency1 requires Member States to incorporate minimum common standards into their national restructuring and insolvency laws by 17 July 2021, with an option to extend that deadline by one year. The intention of the Directive is to reduce barriers to the free flow of capital stemming from differences in Member States’ restructuring and insolvency frameworks, and to enhance the rescue culture in the EU.
Notable features required to be included in Member States’ national laws include:
- An effective preventive restructuring framework to enable debtors experiencing financial difficulties to restructure at an early stage, with a view to preventing insolvency and ensuring their viability.
- A stay of up to four months extendable to up to 12 months to support negotiations of a restructuring proposal, which should prevent individual enforcement action and include rules preventing the withholding of performance, termination, acceleration or modification of essential contracts.
- An ability to cram down dissenting classes of creditors.
- Adequate protection for financing needed to allow the business to survive or to preserve the value of the business pending a restructuring, and for new financing necessary to implement a restructuring plan.
- Provision for honest, insolvent entrepreneurs to have access to a procedure that can lead to a full discharge of their debts (subject to limited exceptions) within three years.
The UK left the EU on 31 January 2020 and therefore it is not required to implement the Directive. However, the UK made several changes to its insolvency law in the course of 2020 many of which mirror key provisions in the Directive. For example, directors faced with financial distress can now weigh up the new restructuring plan, or the existing ‘tried and tested’ scheme of arrangement. The restructuring plan also introduced a cross-class cram-down tool to the UK: the ability for a restructuring plan to bind one or more dissenting classes of creditors or shareholders.
Recognition of foreign insolvency processes
Many restructuring matters will involve more than one jurisdiction. For example, a company registered in England and being wound up under the Insolvency Act 1986 may have branches, subsidiaries or real estate assets located in overseas jurisdictions. When dealing with such cross-border matters, two key issues which often arise for insolvency practitioners are recognition and assistance.
There are various legislative tools within the UK which facilitate cross-border recognition, for example:
- The UNCITRAL Model Law on cross-border insolvency was enacted in the UK by the Cross Border Insolvency Regulations 2006. This is a set of model terms for UN Member States that provide a process for foreign office holders to apply to court for recognition and assistance;
- Section 426 of the Insolvency Act 1986 provides that a court in a country designated by the Secretary of State (including the
Channel Islands, the Isle of Man and most commonwealth countries) can apply to the UK courts for assistance in insolvency proceedings. In providing such assistance, the UK court has a wide discretion and can apply local insolvency law or the relevant foreign insolvency law. The types of assistance the UK court might give under section 426 include an injunctive or administration order; and
- The EU Regulation on Insolvency Proceedings (Recast Insolvency Regulation) applies to proceedings opened in the UK on or after 26 June 2017 and before 11pm on 31 December 2020 (the end of the Brexit transition period). Whilst the Recast Insolvency Regulation will not be relevant to new UK insolvency proceedings, it is relevant to older UK proceedings and to proceedings in EU Member States. Where the Recast Insolvency Regulation does apply, it requires that certain collective insolvency proceedings occurring in one EU Member State are recognised in all other EU Member States and that each EU Member State automatically recognises the powers and authority of an insolvency practitioner appointed in another EU Member State.
Where there is no legislative tool available to allow recognition of insolvency proceedings or assistance of insolvency office holders, common law countries may still provide assistance based on common law rules.
Insolvency changes in response to COVID-19
For more information on changes to insolvency law in England and Wales as a result of the COVID-19 pandemic please see our Guide to changes in insolvency law in response to COVID-19.
*Broadly similar insolvency provisions to those in England and Wales apply in Northern Ireland.
Contact: Robert Russell and Chris Parker
1Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 on preventive restructuring frameworks, on discharge of debt and disqualifications, and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt, and amending Directive (EU) 2017/1132.