Accepting an instruction on insolvency

The most common types of insolvency process that a practitioner will confront in the real estate field are receivership, (historically) administrative receivership, moratoriums, administrations, pre-packaged administration sales, company voluntary arrangements and liquidation. Less frequently, there are also schemes of arrangement and restructuring plans.

Law of Property Act 1925 or fixed charge receivership

Receivership is a term used to describe a situation where a receiver is appointed by a secured creditor to take control of a debtor's secured property. Commonly, more than one individual will be appointed to act as receiver (jointly and severally). A receiver need not be a licensed insolvency practitioner.

The purpose of a receivership is to ensure the proper management and/or the sale of the secured asset over which a receiver is appointed. In the context of real estate, a receiver will typically be a qualified surveyor appointed by a secured creditor of a debtor that has defaulted.

A receiver is granted certain limited statutory powers under the Law of Property Act 1925 (LPA 1925). The terms of the underlying mortgage document may (and usually do) extend or restrict such powers, including the power of a secured creditor to appoint a receiver under the LPA 1925. Accordingly, the terms of any security document must be consulted carefully.

Administrative receivership

Administrative receivership is now a largely historic enforcement option open to a secured creditor who holds a floating charge over all or substantially all of the company’s assets, where the floating charge was created before 15 September 2003 and certain other limited exceptional circumstances.

An administrative receiver is appointed under the terms of the relevant security, and must be a licensed insolvency practitioner.

Following 15 September 2003 and the effective abolition of administrative receivership save for in limited circumstances, the appointment of an administrator is much more common.

Administrations

Administration, where the focus is on company/business rescue, can be commenced by the holder of a floating charge over all or substantially all the assets of the company, by resolution of the company/its directors or by order of the court to meet the following objectives (in priority):

• to rescue the company as a going concern
• to achieve a better result for the company's creditors as a whole than would be likely if the company were wound up (without first being in administration) and
• to realise property to make a distribution to one or more secured or preferential creditors.

In practice it is relatively unusual for the first of the objectives to be achieved. It is more common for administration to be used to obtain a better realisation for creditors than if there was an immediate liquidation. In that context, the administrators will generally seek to sell the business and assets of the company as a going concern and, in doing so, they have a duty to act in the best interests of the company's creditors as a whole when negotiating the sale price.

The unprofitable assets, including any unwanted or over-rented leases, may be left behind in the administration. Unless there is any third-party guarantee or security, or rent deposit, landlords of these leases will usually be left only with an unsecured claim in the administration, where the return is likely to be limited. The main exception to this is if the company continues to occupy the leased premises for the benefit of the company's creditors during administration, in which case rent for the post-administration period of occupation (on a daily basis, rather than quarterly) will be payable as an expense of the administration. The administrators are likely to offer to surrender unwanted or over-rented leases back to the landlord for nil consideration, unless there is any value in them. If this is not accepted, they are likely ultimately to be disclaimed by the company's liquidators once the company exits administration into liquidation.

A purchaser of the business from a company in administration will usually occupy the properties that are transferred immediately following completion, under a licence granted by the company (acting through its administrators). If they have also bought the lease, they will then apply for any necessary landlord consents to assign the leases under which those properties are held. While this is often a technical breach of the alienation covenants in the lease, as the tenant is in administration (and in the absence of the administrators' consent) leave of the court is required before a landlord can enforce any right to forfeit.

A key effect of administration is that it imposes a statutory moratorium preventing other insolvency proceedings or any other legal processes being commenced or continued against the insolvent company without leave of the court or consent of the administrators. This includes any action by a landlord or other creditor – such as distress, forfeiture, suing for rent arrears or enforcement of any judgment, (without the leave of the court or the consent of the administrators).

An administration is generally more expensive and complex than a receivership. Administration is therefore more commonly used for trading businesses with a property element (such as retailers), while receivership is more typical where the property asset or assets form the principal part of the security requiring realisation.

Pre-packaged administration sales

A pre-packaged administration sale is a sale immediately following entry into administration that has been negotiated before the company enters administration. Generally, a purchaser is identified before an administration appointment is made. The sale and purchase agreement for the relevant assets is then negotiated pre-appointment and completed as soon as the administrators have been appointed. The purchaser sometimes has a connection with the seller company being placed into administration (for example, by having common directors or shareholders). If the purchaser is a connected party, the administrator can only conclude the sale if the buyer has obtained the consent of the creditors or a report from an independent evaluator.

Pre-packaged administrations are commonly used for businesses in the retail and leisure sectors, where continuity of trade is important and the value of a business is likely to be eroded significantly during any period in which it remains in an insolvency process.

Company voluntary arrangements

A company voluntary arrangement (CVA) is a composition or arrangement between a debtor company and its creditors. Creditors may agree to a lesser payment than their contractual entitlement, and/or to defer payments, in a situation where the alternative is an insolvent liquidation and therefore the likelihood of very little return to creditors.

In property terms, this typically involves a debtor tenant agreeing with their landlords, and all of their other creditors, a proposal that will enable them to restructure their liabilities (including those arising under leases). This may involve:

• rental concessions, including future rent during a notice period before a landlord can terminate the lease and dilapidations
• closure of premises
• rolling break options and
• in some cases, a compensation fund upon which disadvantaged landlords can draw.

A CVA cannot interfere with a landlord's proprietary interest, and as such cannot oblige landlords to accept a surrender of a lease or to waive forfeiture rights.

For a voluntary arrangement to be effective, support is needed from 75% by value of the creditors voting on the CVA. There is a further condition that no more than 50% (by value) of any creditors who vote against the proposal (or a modification of it) are creditors who are unconnected with the company. Once approved, all unsecured creditors who were entitled to vote will be bound by the CVA. Secured creditors are not bound by a CVA unless they expressly vote in favour, and preferential creditors' preferential rights are also protected (again, unless they expressly vote in favour).

Such a process is often controversial because it enables tenants who make an approved arrangement to override lease obligations, sometimes against the wishes of disadvantaged landlords. Creditors may apply to court to set aside a CVA on the grounds of material irregularity in the process, or unfair prejudice to it or to a class of creditors. The courts have recently held that treatment of landlords less favourably than other classes of creditors is not automatically unfairly prejudicial on the basis that landlords can still forfeit the lease if they wish to do so, it not being possible to vary the right to forfeiture under a CVA. Challenges must be instituted within 28 days of approval of the CVA.

There is a similar process for individual debtors known as an individual voluntary arrangement.

Liquidation

There are three types of liquidation. A members' voluntary liquidation is a solvent liquidation to distribute assets to its members. The other two types of liquidation are a creditors' voluntary liquidation (an out-of-court process initiated by the members) and a compulsory liquidation, which is by order of the court. The winding-up of a company is terminal. A liquidator is appointed to realise the company’s remaining assets and, where appropriate, make claims against third parties, such as company directors, in order to make returns for the benefit of creditors. The liquidator will adjudicate on all creditors’ claims and discharge those claims in a statutory prescribed order of priority. An onerous lease may be disclaimed by a liquidator. At the conclusion of a liquidation, the company is dissolved. All unsecured creditors rank equally, behind secured and preferential creditors (which now includes certain HMRC claims), and the liquidator's fees and expenses. This often means that unsecured creditors will receive little return on their debt.

Individuals may be subject to bankruptcy proceedings.

Moratorium (Part A1 Corporate Insolvency and Governance Act 2020)

The directors of a company may lodge certain forms with the court to start a 'moratorium' process. A licensed insolvency practitioner is appointed ‘monitor’ of an initial 20-business-day period. During this period there is a moratorium providing the company with protection from certain creditor action, including insolvency proceedings, enforcement of security and forfeiture. The period may be extended by the directors for a further 20 business days without consent, or for longer with court or pre-moratorium creditors' consent.

The directors remain in control of the company, but the monitor oversees the moratorium on behalf of creditors, and is obliged to terminate it in a number of scenarios, including where rescue as a going concern is no longer likely. The moratorium provides a 'payment holiday' for most of its pre-moratorium debts (but not for 'finance debts', including bank debts and other liabilities under contracts or instruments involving financial instruments). There are two qualifying conditions for a moratorium:

• A directors' statement needs to be made confirming that the company is or is likely to become unable to pay its debts as they fall due.
• The monitor considers it likely that the moratorium would result in a rescue of the company as a going concern.

Scheme of arrangement

Schemes of arrangement are Companies Act 2006 processes that are available for solvent and insolvent companies.

Directors can propose an arrangement between the company and its creditors and/or members. The creditors/members are divided into 'classes' and vote in their class blocks. Which creditors should form a class is a detailed factual and legal analysis. As with a CVA, if 75% by value agree, the scheme can bind dissenting creditors/members of that class, but unlike a CVA this can include secured and preferential creditors. A scheme of arrangement does not result in an automatic moratorium and may not be recognised in jurisdictions outside of England and Wales.

The scheme is a two-stage court process, the key features of which are:

• An order is obtained from the court that meetings of creditors, or classes of creditors, or members, or classes of members, should be convened to consider the scheme (convening hearing).
• The meetings of the creditors, classes of creditors, members, or classes of members are held, and, if approved by 75% in value of those voting, an order is obtained from the court sanctioning the scheme (sanction hearing).

Opposition to the scheme may be expressed at either the convening hearing or sanction hearing. Information and consultation are key. Approval by the company's creditors and/or members must have been reasonable. Without fair, full and adequate information, the court will probably be unable to place any reliance on, or give effect to, an affirmative vote at the sanction hearing.

The restructuring plan (Part 26A Companies Act 2006)

A restructuring plan is another procedure (in addition to a CVAs and schemes of arrangement) under which the directors can propose a compromise of the rights of its creditors and/or members. Crucially, the arrangement may bind dissenting classes of creditors or shareholders (<25% by value of that class) where certain conditions are met, which is known as a ‘cram-down’. As with a scheme of arrangement, the plan is a two-stage court process, the key features of which are:

• An application is made to court for an order that meetings of creditors, or classes of creditors, or members or classes of members should be convened to consider the restructuring plan.
• The creditors and/or shareholders who do not have a genuine economic interest in the company will not need to participate in the meeting.
• At the meeting the creditors, classes of creditors, members or classes of members will vote on the plan, and it will be approved if 75% in value of those voting approve it.
• The court will then be asked to sanction the plan if one or more classes of creditors or members approve the plan.
• The court can bind dissenting classes of creditors on certain conditions.

The court must be satisfied members of a dissenting class would not be any worse off in the restructuring plan than they would be in the event of the relevant alternative (usually liquidation) and the plan has been approved by 75% in value of a class of creditors or members who would receive a payment or have a genuine economic interest in the company in the event of the relevant alternative.

It is possible for a company to apply for a new free-standing moratorium while negotiating a restructuring plan with its creditors if it fulfils the criteria as detailed above.

Ipso facto provisions

These provisions override termination clauses, which provide for termination for reasons of insolvency in supplier contracts in order to preserve the value in a business and facilitate its rescue. The company must have entered into a ‘relevant insolvency procedure’, being a moratorium, administration, administrative receivership, company voluntary arrangement, liquidation, provisional liquidation or restructuring plan. Any provision that then allows for termination of a contract for the supply of goods and services (or for a party to do ‘any other thing’) ceases to apply. This has been implemented as a permanent addition to the Insolvency Act 1986, section 233B.

Commercial Rent (Coronavirus) Act 2022

This legislation came into force on 24 March 2022 to ‘make provision enabling relief from payment of certain rent debts under business tenancies adversely affected by coronavirus to be available through arbitration; and for connected purposes’.

The legislation introduced ‘protected rent debts’, rent owed under a business tenancy where the business was forced to close between 14:00 on 21 March 2020 and 23:55 on 18 July 2021 (England) or 06:00 on 7 August 2021 (Wales) – or the last day on which the business was obliged to remain closed. Such rent debts can now be the subject of an arbitration scheme and, until 24 September 2022 or the conclusion of any arbitration, landlords cannot:

• claim against tenants or guarantors for the protected rent debts
• exercise their commercial rent arrears powers
• enforce re-entry or forfeit
• use a tenant's deposit to settle or offset protected rent debts
• present a winding-up petition or bankruptcy petition against tenants or guarantors (unless the tenant also owes unprotected rent debts), or
• enforce a money judgment in respect of protected rent debts.