building blocks: insolvency special The cuts revealed in the Comprehensive Spending Review have not been quite as bad as the construction industry had apparently been expecting (£3.5 billion not as bad). Nevertheless there have still been billions of pounds shaved off various departmental budgets which will affect the construction industry. Where public spending has in the past been a reliable source of income, some companies are inevitably now going to feel the effect of the cuts.
Administrative receivership A receiver or manager is appointed over the whole of the company’s property by the holder(s) of a debenture (document evidencing a debt) secured by a charge. This is becoming less common as the power to appoint receivers no longer exists in debentures created after September 2003. A company can continue to trade in administrative receivership although the appointment of a receiver is usually indicative of financial problems.
We have seen a steady stream of developers, contractors and consultants become insolvent over the last six months and find ourselves advising clients on the fall out. At the time of writing, Rok has also just been placed in administration. The running count grows. While this topic is hardly full of Christmas cheer, we felt that this special edition of Building Blocks was necessary following the publication of the government spending review.
Company Voluntary Arrangement (CVA) A proposal made by the directors of a company to its creditors for the satisfaction of the company’s debts at a discount. If the proposal is agreed by the creditors it becomes binding and the carrying out of the arrangement is supervised by an insolvency practitioner. Trading can continue in a CVA and the directors remain in charge of the business. CVAs can last for up to five years.
Insolvency is a huge area of law and the complexities are far too many in number to go into in detail, however, in this edition we set out some basics of insolvency law and give a construction industry specific flavour with the aim of helping you to protect your organisation from the effects of employers, contractors and consultants who have entered or are about to enter into a form of insolvency arrangement. There is a section detailing useful insolvency related resources and we end with an article on insolvency and public procurement by Helen Prandy who is an Associate in our Restructuring and Insolvency Group.
The law The word insolvency covers a multitude of different situations. Some of the technical terms and circumstances are set out below. The law comes from the Insolvency Acts of 1986 and 2000, the Enterprise Act 2002 and the Company Directors Disqualification Act 1986. Administration A process whereby an administrator is appointed with the aim of either rescuing the company as a going concern or achieving a better realisation for creditors than would be available in liquidation. An administrator can be appointed by certain types of floating charge holders, the court or the company directors (the latter is often referred to as self certification administration). The company may continue to trade in administration under the control of the administrator, rather than the directors. Administration should only last for one year before the company must either go into liquidation or a CVA, if it can continue as a going concern.
Insolvency practitioner A licensed individual entitled to take appointment as a liquidator, administrator, supervisor of an arrangement or administrative receiver. Liquidation This can be voluntary or compulsory (by a court order) and is terminal, leading to the dissolution of the company. A company’s creditors may petition the court for an order that a liquidator is appointed and the company is wound up; alternatively A creditors’ voluntary winding up arises at the instigation of the company directors with approval from its shareholders. In either case, the company must be insolvent either on a balance sheet or a cash flow basis. The purpose