storage shelving

As a company nears insolvency, UK law provides four main procedures by which the company could potentially be rescued or wound down and its assets distributed. First, a company voluntary arrangement,[82] allows the directors of a company to reach an agreement with creditors to potentially accept less repayment in the hope of avoiding a more costly administration or liquidation procedure and less in returns overall. However, only for small private companies is a statutory moratorium on debt collection by secured creditors available. Second, and since the Enterprise Act 2002 the preferred insolvency procedure, a company which is insolvent can go under administration. Here a qualified insolvency practitioner will replace the board of directors and is charged with a public duty of rescuing the company in the interests of all creditors, rescuing the business through a sale, getting a better result for creditors than immediate liquidation, or if nothing can be done effecting an orderly winding up and distribution of assets. Third, administrative receivership is a procedure available for a fixed list of eight kinds of operation (such as public-private partnerships, utility projects and protected railway companies[83]) where the insolvency practitioner is appointed by the holder of a floating charge that covers a company's whole assets. This stems from common law receivership where the insolvency practitioner's primary duty was owed to the creditor that appointed him. After the Insolvency Act 1986 it was increasingly viewed to be unacceptable that one creditor could manage a company when the interests of her creditor might conflict with those holding unsecured or other debts. Fourth, when none of these procedures is used, the business is wound up and a company's assets are to be broken up and sold off, a liquidator is appointed. All procedures must be overseen by a qualified insolvency practitioner.[84] While liquidation remains the most frequent end for an insolvent company, UK law since the Cork Report has aimed to cultivate a "rescue culture" to save companies that could be viable.
Company voluntary arrangement
See also: Company Voluntary Arrangement and Individual Voluntary Arrangement
In IRC v Wimbledon Football Club Ltd[85] the Court of Appeal held that the objection of the Inland Revenue (then a preferential creditor) would not be an absolute bar to a CVA, after Wimbledon F.C. prevaricated over relocation.

Because the essential problem of insolvent companies is excessive indebtedness, the Insolvency Act 1986 sections 1 to 7 contain a procedure for companies to ask creditors to reduce the debt they are owed, in the hope that the company may survive. For instance, directors might propose that each creditor accepts 80 per cent of the money owed to each, and to spread repayments out over five years, in return for a commitment to restructure the business' affairs under a new marketing strategy. Under chapter 11 of the US Bankruptcy Code this kind of debt restructuring is usual, and the so-called "cram down" procedure allows a court to approve a plan over the wishes of creditors if they will receive a value equivalent to what they are owed.[86] However, under UK law, the procedure remains predominantly voluntary, except for small companies. A company's directors may instigate a voluntary arrangement with creditors, or if already appointed, an administrator or liquidator can also propose it.[87] Importantly, secured and preferential creditors' entitlements cannot be reduced without their consent.[88] The procedure takes place under the supervision of an insolvency practitioner, to whom the directors will submit a report on the company's finances and a proposal for reducing the debt.

Aside from a contract that creates a security interest to back repayment of a debt, creditors to a company, and particularly trade creditors may deploy two main equivalents security. The effect is to produce proprietary rights which place them ahead of the general body of creditors. First, a trade creditor who sells goods to a company (which may go into insolvency) can contract for a retention of title clause. This means that even though the seller of goods may have passed possession to a buyer, until the price of sale is paid, the seller has never passed property. The company and creditor agree that title to the property is retained by the buyer until the date of payment. In the leading case, Aluminium Industrie Vaassen BV v Romalpa Aluminium Ltd[77] a Dutch company making aluminium foil stipulated in its contract with Romalpa Aluminium Ltd that when it supplied the foil, ownership would only passed once the price had been paid, and that any products made by Romalpa would be held by them as bailees. When Romalpa went insolvent, another creditor claimed that its floating charge covered the foil and products. The Court of Appeal held, however, that property in the foil had never become part of Romalpa's estate, and so could not be covered by the charge. Furthermore, the clause was not void for want to registration because only assets belonging to the company and then charged needed to be registered. In later cases, the courts have held that if property is mixed during a manufacturing process so that it is no longer identifiable,[78] or if it is sold onto a buyer,[79] then the retention of title clause ceases to have effect. If the property is something that can be mixed (such as oil) and the clause prohibits this, then the seller may retain a percentage share of the mixture as a tenant in common. But if the clause purports to retain title over no more than a part of the property, Re Bond Worth Ltd held that the clause must take effect in equity, and so requires registration.[80] The present requirements in the Companies Act 2006 section 860 continue not to explicitly cover retention of title clauses, in contrast to the registration requirements in the US Uniform Commercial Code article 8. This requires that anything with the same effect as a security interest requires registration, and so covers retention of title provision.

A second main equivalent to a security interest is a "Quistclose trust" named after the case Barclays Bank Ltd v Quistclose Investments Ltd.[81] Here a company named Rolls Razor Ltd had promised to pay a dividend to its shareholders, but had financial difficulty. Already in debt to its bank, Barclays, for £484,000 it agreed to take a loan from Quistclose Investments Ltd for £209,719. This money was deposited in a separate Barclays account, for the purpose of being paid out to shareholders. Unfortunately, Rolls Razor Ltd entered insolvency before the payment was made. Barclays claimed it had a right to set off the Quistclose money against the debts that were due to it, while Quistclose contended the money belonged entirely to it, and could not be used for the satisfaction of other creditors. The House of Lords unanimously held that a trust had been created in favour of Quistclose, and if the purpose of the payment (i.e. to pay the shareholders) failed, then the money would revert to Quistclose's ownership. While Quistclose trust cases are rare, and their theoretical basis has remained controversial (particularly because the trust is for a purpose and so sits uncomfortably with the rule against perpetuities), trusts have also been acknowledged to exist when a company keeps payments by consumers in a separate fund. In Re Kayford Ltd a mail order business, fearing bankruptcy and not wanting pre-payments by its customers to be taken by other creditors, acted on its solicitors' advice and placed their money in a separate bank account. Megarry J held this effectively ensured other creditors would not have access to this cash. Since the Insolvency Act 1986 reforms, it is probable that section 239, which prohibits transactions that desire to give a preference to one creditor over others, would be argued to avoid such an arrangement (if ever a company does in fact seek to prefer its customers in this way). The position, then, would be that while banks and trade creditors may easily protect themselves, consumers, employees and others in a weaker bargaining position have few legal resources to do the same.
Procedures
See also: Chapter 11, Title 11, United States Code
After declining sales in the 2007-2008 financial crisis the Woolworths Group was put under administration. Neither the company nor the business were saved, and the assets were liquidated, culminating in a final fire sale.

Especially as automatic crystallisation ceased to make floating charges an effective form of priority, the next step by businesses was to contract for fixed charges over every available specific asset, and then take a floating charge over the remainder. It attempted to do this as well over book debts that a company would collect and trade with. In two early cases the courts approved this practice. In Siebe Gorman & Co Ltd v Barclays Bank Ltd[69] it was said to be done with a stipulation that the charge was "fixed" and the requirement that proceeds be paid into an account held with the lending bank. In Re New Bullas Trading Ltd[70] the Court of Appeal said that a charge could purport to be fixed over uncollected debts, but floating over the proceeds that were collected from the bank's designated account. However the courts overturned these decisions in two leading cases. In Re Brumark Investments Ltd[71] the Privy Council advised that a charge in favour of Westpac bank that purported to separate uncollected debts (where a charge was said to be fixed) and the proceeds (where the charge was said to be floating) could not be deemed separable: the distinction made no commercial sense because the only value in uncollected debts are the proceeds, and so the charge would have to be the same over both.[72] In Re Spectrum Plus Ltd,[73] the House of Lords finally decided that because the hallmark of a floating charge is that a company is free to deal with the charged assets in the ordinary course of business, any charge purported to be "fixed" over book debts kept in any account except one which a bank restricts the use of, must be in substance a floating charge. Lord Scott emphasised that this definition "reflects the mischief that the statutory intervention... was intended to meet and should ensure that preferential creditors continue to enjoy the priority that section 175 of the 1986 Act and its statutory predecessors intended them to have."[74] The decision in Re Spectrum Plus Ltd created a new debate. On the one hand, John Armour argued in response that all categories of preferential would be better off abolished, because in his view businesses would merely be able to contract around the law (even after Re Spectrum Plus Ltd) by arranging loan agreements that have the same effect as security but not in a form caught by the law (giving the examples of invoice discounting or factoring).[75] On the other hand, Roy Goode and Riz Mokal have called for the floating charge simply to be abandoned altogether, in the same way as was recommended by the Minority of the Loreburn Report in 1906.[76]
Equivalents to security
Main articles: Title retention clause and Quistclose trust
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