Voluntary arrangements and administration

Chapter 22

Voluntary arrangements and administration

Chapter Contents

22.1    Voluntary arrangements

22.2    Administration

22.3    Appointment by the court

22.4    Appointment by the company or the company’s directors

22.5    Appointment by a qualifying floating chargeholder

22.6    The administrator’s proposals

22.7    Effects of administration

22.8    Powers of the administrator

22.9    Contracts of employment and the Enterprise Act 2002

22.10  Fair dealing

22.11  Termination of administration


Self-test questions

Further reading

22.1  Voluntary arrangements

Part I of the Insolvency Act 1986 (ss 1–7) provides a simple procedure whereby a company that is in financial difficulties may enter into a voluntary arrangement with its creditors. This arrangement may involve either a composition in satisfaction of its debts – that is, provision for creditors to receive a percentage of what is due to them – or a scheme of arrangement of its affairs.

The voluntary arrangement must be supervised by a person, ‘the nominee’, who must be a qualified insolvency practitioner. The proposal for a voluntary arrangement may be made by the directors of a company or where an administration order is in force by the administrator or where the company is being wound up by the liquidator (s 1 of the Insolvency Act 1986).

If the nominee is not the company’s administrator or liquidator, then the proposal should be submitted to him, together with a statement of the company’s affairs containing particulars of the company’s assets, creditors, liabilities and debts. The nominee must then submit a report to the court stating whether, in his opinion, meetings of the company and of its creditors should be summoned to consider the proposal, and if, in his opinion, such meetings should be summoned, the date on which and place at which they should be held (s 2 of the Insolvency Act 1986).

If the nominee is the company’s liquidator or administrator, he should summon meetings of the company and of its creditors to consider the proposal (s 3(2) of the Insolvency Act 1986).

The meetings summoned must then determine whether to approve the proposed voluntary arrangement with or without modifications. A meeting may not approve:

(a)  any proposal that affects the right of a secured creditor of the company to enforce his security except with his consent;

(b)  the withdrawal of the priority of a preferential debt over other debts, except with the consent of the creditor; or

(c)  the payment of a proportion of preferential debts to a preferential creditor that is a smaller proportion than is to be received by other preferential creditors except with the consent of the creditor.

The proposal must be approved by three-quarters in value of the creditors present and voting and by a simple majority of the members, according to the Insolvency Rules.

If the voluntary arrangement is approved, then, if the company is being wound up or if an administration order is in force, the court may stay the winding-up proceedings or discharge the administration order, or it may give such directions as it thinks appropriate to facilitate the implementation of the voluntary arrangement (s 5 of the Insolvency Act 1986). There is a period of 28 days from the date when the nominee reports the results of the meetings’ consideration to the court for members, creditors and others to object to the court (s 4(6) of the Insolvency Act 1986).

On the application of a member, contributory creditor, nominee or, if appropriate, liquidator or administrator, the proposal may be challenged on the ground that it unfairly prejudices the interests of a creditor, member or contributory of the company, or that there has been some material irregularity at or in relation to either of the meetings.

Once the proposal for the voluntary arrangement has taken effect, the nominee becomes the supervisor of the composition of the voluntary arrangement. The supervisor may apply for a winding up to be ordered or for an administration order to be made.

If any creditor or some other interested party is dissatisfied with any act, omission or decision of a supervisor, he may apply to the court to give the supervisor directions or to alter the decision etc. in question (s 7 of the Insolvency Act 1986).

The voluntary arrangement procedure is a valuable one. It was added to British company law at the behest of the Cork Committee 1982 (paras 400–403), which considered that companies, like individuals, should be able to enter into binding arrangements with their creditors.

On 6 April 1995 the government announced proposals for a new form of procedure for dealing with companies in financial trouble (Revised Proposals for a New Company Voluntary Arrangement Procedure). The directors of a company would be given 28 days to put together a rescue plan. During this moratorium the company would be supervised by a licensed insolvency practitioner.

There are safeguards for lenders and creditors. There has to be a reasonable prospect of success in the opinion of the insolvency practitioner before the plan can be put into force. There must be a creditors’ meeting within 28 days of the commencement of the moratorium. If more than 75 per cent of the creditors in value support the proposals, it is binding on all creditors. The creditors can reject the entire project. They can also extend it.

22.2  Administration

Following the report of the Review Committee on Insolvency Law and Practice – the Cork Report 1982 (Cmnd 8558, 1982) – a government white paper (A Revised Framework for Insolvency Law (Cmnd 9175, February 1984)) echoing some of its recommendations set out a procedure to facilitate the rehabilitation or reorganisation of a company. This process was the administration process and it was incorporated into the Insolvency Act of 1985, which was in turn consolidated in the Insolvency Act 1986. In essence, the scheme of administration is to make possible the rescue of a company by placing its management in the hands of an administrator. For as long as the administration is in force, it is not possible to commence winding-up proceedings or any other process against the company or to enforce any charge, hire purchase or retention of title provision against the company without the leave of the court.

The corporate insolvency provisions of the Enterprise Act 2002, which came into force on 15 September 2003, made fundamental changes to the law of insolvency.

Henceforth the holder of a floating charge created on or after 15 September 2003 cannot generally appoint an administrative receiver but must instead appoint an administrator. The court-based administrative procedure of Part II of the Insolvency Act 1986 is replaced by a new system. There are henceforth three ways of appointing an administrator:

(a)  by the court;