South Square Chambers
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2 Contributions by South Square Chambers
PRACTICE NOTES
Anti-deprivation and pari passu principles: scope, defences, overlap and leading cases in insolvency
This Practice Note explores the anti-deprivation principle (ADP), the pari passu principle (PPP) and how these principles diverge.
The anti-deprivation principle
The ADP is a rule designed to stop parties contracting out of the statutory framework for the collection, realisation and distribution of an insolvent estate. It bars the removal of assets that ought to sit within that estate. In this way, it safeguards the estate’s value against attempts to bypass insolvency laws and works to ensure an insolvent estate is not deprived of property that would otherwise be available for its creditors.
History
The ADP has its origins in the old common law rules of bankruptcy. Although it was once labelled a fraud on the bankruptcy laws, it is now known as the ‘anti-deprivation principle’.
Case law
Having fallen into relative obscurity, the ADP re-emerged in a number of significant judgments. It has been examined and applied in
Restructuring & Insolvency
PRACTICE NOTES
What is an interim receiver?
If it is shown that the debtor’s assets need protecting, the court may, at any point after a creditors’ bankruptcy petition has been presented and before a bankruptcy order is made, appoint an interim receiver of the debtor’s property under section 286 of the Insolvency Act 1986 (IA 1986). For these purposes, the property in question comprises all assets belonging to the debtor, whether or not they would ultimately fall within the bankruptcy estate. The appointment of an interim receiver is therefore an urgent safeguard within personal insolvency to avert depletion of the estate, comparable to the appointment of a provisional liquidator in corporate insolvency. In some situations, circumstances call for active, interventionist measures to secure the debtor’s property before a bankruptcy order is made. For additional reading on provisional liquidation, see Practice Note: What are
Restructuring & Insolvency
8 Contributions by South Square Chambers Experts
PRACTICE NOTES
This Practice Note
This Practice Note outlines what qualifies as an administration expense and highlights leading case law. In an administration, such expenses are paid out of the company’s assets in administration in a defined order:
after fixed charge creditors
but before preferential creditors, floating charge holders and unsecured creditors
This sequence of priorities (the ‘waterfall’) was modified by the Corporate Insolvency and Governance Act (CIGA 2020) where the administration is preceded by a moratorium under Part A1 of the Insolvency Act 1986 (IA 1986). Various types of expense are identified by IA 1986 and the Insolvency (England and Wales) Rules 2016 (IR 2016), SI 2016/1024. The IR 2016, SI 2016/1024 also set out, with specificity, the payment priority to be applied to the different categories of expense. Consequently, a creditor seeking to improve their position must not only
Restructuring & Insolvency
PRACTICE NOTES
The Insolvency (England and Wales) Rules 2016 (IR 2016), SI 2016/1024 lay down the framework for decision-making across all insolvency procedures. The detailed rules governing such decisions appear in IR 2016, SI 2016/1024, Pt 15. Since the Enterprise Act 2002 reforms, the ambit of administrative receivership has been sharply reduced. A receiver of that type can no longer be appointed under a qualifying floating charge, as set out in Schedule B1 to the Insolvency Act 1986 (IA 1986), created on or after 15 September 2003, save in a narrow range of cases of minimal general practical significance. In practice, a debenture holder will almost invariably opt to appoint an administrator rather than seeking the appointment of an administrative receiver.
Relationship between the administrative receiver and creditors
IA 1986, s 47(3) places a duty on the following persons to prepare and deliver a statement of affairs to an
Restructuring & Insolvency
PRACTICE NOTES
The Insolvency (England and Wales) Rules 2016 (IR 2016), SI 2016/1024 set out the overarching framework for decision-making across all formal insolvency processes. Although decision procedures specifically appear in IR 2016, SI 2016/1024, Pt 15, company voluntary arrangements (CVAs) are instead covered in IR 2016, SI 2016/1024, Pt 2. For a further general guide to decision-making, see Practice Note: Voting and creditors' decision procedures.
Creditor claims
There is no express statutory definition of ‘creditor’ in the Insolvency Act 1986 (IA 1986) or IR 2016, SI 2016/1024 for the purposes of a CVA. For individual voluntary arrangements (IVAs), the expressions ‘debt’ and ‘liability’ are each defined to embrace ‘debts or liabilities which are present or future, certain or contingent or in respect of an amount which is fixed or liquidated or is capable of being ascertained by fixed rules or as a matter of
Restructuring & Insolvency
PRACTICE NOTES
Provable debts
The starting point for what counts as a provable debt in administration, winding-up and bankruptcy is Insolvency (England and Wales) Rules 2016 (IR 2016), SI 2016/1024, r 14.2(1). In essence, save where the rule provides otherwise, all creditor claims are provable against the company or the bankrupt, whether due now or in the future, fixed or contingent, quantified or recoverable only as damages. This sits alongside section 322 of the Insolvency Act 1986 (IA 1986) on proof of debts in bankruptcy, and IA 1986, s 382, which sets out what constitutes a bankruptcy debt. It should also be considered with IR 2016, SI 2016/1024, r 14.1, which defines “debt”, “small debt” and “liability”. Read together, these provisions supply the statutory framework for identifying debts and determining which debts are provable across different insolvency processes. An office-holder may, for dividend purposes only, treat small
Restructuring & Insolvency
PRACTICE NOTES
An income payments agreement (IPA) is a counterpart to an income payments order (IPO), used where a bankrupt person consents to pay their spare income into the bankruptcy estate. Such contributions are made voluntarily rather than by a court order. To explore IPAs more fully, it helps to revisit the concept of an IPO.
What is an IPO and when is it used?
Once a bankruptcy order is made against an individual, the bankrupt no longer has to make further direct payments to creditors. Frequently, this means their income exceeds what is required for ordinary household outgoings. While the bankrupt remains undischarged, the court may, under section 310 of the Insolvency Act 1986 (IA 1986), impose an IPO, specifying the amount of the bankrupt’s income that is to be claimed for the benefit of the estate during the time the order is in force, as
Restructuring & Insolvency
PRACTICE NOTES
General
Creditors decide whether, and to what extent, an individual voluntary arrangement (IVA) proposal should be approved. In-person meetings are no longer the default way to reach decisions; the nominee may instead choose a qualifying decision procedure to obtain creditors’ views on the proposal. These procedures are set out in the Insolvency (England and Wales) Rules 2016 (IR 2016), SI 2016/1024, Pt 15. The relevant procedure or any meeting is overseen by the convener or chair, almost always the nominee; if the nominee cannot attend, a replacement will act on their behalf.
Creditors’ consideration of the proposal
The debtor’s proposal is the foundation of any IVA. IR 2016, SI 2016/1024, r 8.3 specifies the required contents of an IVA proposal. Where no interim order is sought, the nominee must inform creditors of their opinion on the viability of the debtor’s proposal within 14 days of the
Restructuring & Insolvency
PRACTICE NOTES
What are expenses?
All fees, costs, charges and any other outgoings arising during a winding up (Insolvency (England and Wales) Rules 2016 (IR 2016), SI 2016/1024, rr 6.42 and 7.108), administration (IR 2016, SI 2016/1024, r 3.50) or bankruptcy (IR 2016, SI 2016/1024, r 10.148) are treated as expenses of the relevant winding up, administration or, as applicable, the bankruptcy...
For liquidation and bankruptcy, the applicable provisions are IR 2016, SI 2016/1024, r 6.42 (creditors’ voluntary winding up), IR 2016, SI 2016/1024, r 7.108 (winding up by the court) and IR 2016, SI 2016/1024, r 10.149 (bankruptcy). As many of these provisions are framed in almost identical terms, the following observations apply across all three rules. Whether spending by a liquidator or a trustee in bankruptcy (trustee) qualifies as an expense of the liquidation or the bankruptcy is not a matter over which the court has any
Restructuring & Insolvency
PRACTICE NOTES
The Insolvency (England and Wales) Rules 2016 (IR 2016), SI 2016/1024 set out a refreshed framework for taking decisions across all insolvency processes. The granular rules on decision-making are contained in IR 2016, SI 2016/1024, Pt 15. This Practice Note addresses the practical steps for forming a liquidation committee and explains the general creditors’ decision-making in liquidation. In reality, a liquidation committee carries considerable weight where cases are sizeable and complex.
The liquidation committee
Liquidators must obtain decisions by deemed consent or through a qualifying decision procedure. Physical meetings are permissible only when the relevant minimum number of creditors so request under section 246ZE of the Insolvency Act 1986 (IA 1986), though creditors may call for one before the notice of deemed consent or qualifying decision procedure is sent. In a creditors’ voluntary liquidation, creditors will be asked to determine if a
Restructuring & Insolvency
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