Sources of English Corporate Insolvency Law

Reference is quite frequently made to the ‘insolvency code’ but this is misleading; there is no codification of English insolvency law which would bear comparison with a civil law code. The term is used colloquially to refer to the general body of insolvency law, covering both personal and corporate insolvency, which derives from a number of different sources. The term is also sometimes used more specifically to refer to the rules dealing with the ranking and priority of creditors.

The Concept of Insolvency Proceedings

Insolvency proceedings, whether of a terminal or a reorganizational nature, are the proceedings which can be invoked by or in respect of a company so as to subject its property and affairs to the rules of insolvency law applicable to the administration of an insolvent estate.

Distribution of the Estate

Consistently with it being a terminal insolvency procedure, distribution of the insolvent estate amongst the company’s creditors (and members in the event of a surplus) is the principal function of a liquidation. Administration is not directly comparable in this respect. Where administration is used for the purposes of rescue or restructuring, there may be no need for the administrator to make distributions but, on the other hand, it may be a ‘liquidating’ or ‘distributing’ administration where the wider powers of an administrator are used to achieve a better result for creditors than that achievable in liquidation. As explained in Chapter 8, the latter form of administration was facilitated by the Enterprise Act remodelling of the administration provisions of the Act and it is now common for an administrator with realizations available for distribution to creditors to use his own powers in that respect instead of putting the company into liquidation. The treatment of the claims of pre-proceeding creditors is the same whether distributions to them are made by an administrator exercising his own powers or by a liquidator appointed immediately following an administration.

Creditors’ Rights as a Class Remedy

The concept of insolvency proceedings as a class remedy is one consequence of the collective nature of insolvency proceedings under the Act. It explains the need for creditors’ rights to be exercised in accordance with the purposes of the legislation. The concept is a judicial construct which, although a logical progression from the statutory rules, is not mentioned in the legislation itself.

Ranking of Claims, Pari Passu Distribution, and Contracting Out

The order in which claims on the insolvent estate are discharged was summarized by Lord Neuberger PSC in Re Nortel GmbH where he said:

Phoenixism and Pre-Packing

There is no necessary connection between phoenixism and pre-packing; each can occur without the other but it is the combination of both which attracts most controversy. ‘Phoenixism’ is the term used to describe the re-emergence, after insolvency proceedings, of the same business under the same management. Pre-packing is the process of executing a pre-arranged sale of a business immediately upon the appointment of an administrator. In practice, most pre-packs are sales to connected persons—hence taking these subjects together for the purposes of this book.

Cross-border Insolvency

In the practice of insolvency law, the usual challenge is to work out the answer to a problem as a matter of general law and then to factor in the consequences of one or more of the parties being insolvent. In cross-border insolvency cases, this exercise can be made considerably more complicated by choice of law issues. Ultimately, cross-border insolvency questions are all questions of private international law which are determined in accordance with specific rules where applicable or otherwise in accordance with general principles. The aims are to recognize properly grounded foreign insolvency proceedings, to act in aid of them where appropriate, to ensure that English proceedings will achieve extra-territorial recognition where necessary, and thereby to achieve fairness for all creditors everywhere by avoiding conflicts and confusions between jurisdictions.

Wrongdoing by Directors and Others

Both outright dishonesty and genuine misfortune are less common than is sometimes supposed; most insolvencies result from a degree of culpable mismanagement. Although the work of office-holders appointed in insolvency proceedings is primarily concerned with the administration of the insolvent estate, examination of the causes of insolvency and the punishment of malpractice are also important. Accordingly, insolvency law includes various provisions by means of which malpractice can be pursued. It is a statement of the obvious that failure to take proper action in respect of malpractice encourages degeneration in attitudes to debt. The treatment of malpractice is therefore central to the wider social and economic purposes of insolvency law.

English Corporate Insolvency Proceedings

There are currently three forms of corporate insolvency proceeding in English law. Liquidation (whether compulsory or voluntary) is a terminal proceeding designed to realize the assets of the debtor company and distribute the realized value amongst creditors according to their respective priorities, following which the company is dissolved. Administration and company voluntary arrangements (CVA) (not mutually exclusive and sometimes used together) are two different forms of proceeding which are primarily designed to preserve going concerns. Although the three procedures are constituted as standalone procedures under the Act, there is considerable room for movement from one procedure into another in order to achieve an optimal outcome for creditors.

Expenses

Insolvency proceedings inevitably entail cost. In addition to the office-holder’s remuneration, there will be a wide range of other expenses—partly arising out of getting in the company’s assets and making such distributions as the proceeds permit but also arising out of discharging compliance obligations. However, an office-holder does not generally have any personal liability for the expenses which he incurs unless he enters into a contract in his personal capacity or incurs costs in the unsuccessful pursuit of litigation brought in his own name.