Whether the terms of a CVA are fair and sensible has a bearing on their meaning, according to the Court of Appeal in Re Energy Holdings (No 3) Ltd (in liquidation) [2009] EWCA Civ 173 CA.

The EH3 proposals included the following term at para 23.5:

"Claim Forms must be lodged with the CVA Supervisors of the relevant CVA Company on or before the Claims Date. If a Claim Form is lodged after the Claims Date, a CVA Claim will not rank for Distributions unless the CVA Supervisors of the relevant CVA Company or the Court determines either that the failure to lodge the Claim Form earlier did not result from a wilful default or lack of reasonable diligence on the part of the CVA Creditor, or that the CVA Creditor:

(a) did not have notice of the Creditors' Meeting of the relevant CVA Company; and

(b) within 28 days of becoming aware that the Creditors' Meeting of the relevant CVA Company had taken place it lodged its Claim Form with the CVA Supervisors."

At first sight you may very well think that a creditor who did not have notice and did not make a claim within 28 days of becoming aware of the creditors' meeting cannot be entitled to a distribution.

However, this construction creates an anomaly in that a creditor with notice has 45 days to claim (para 4.2), but a creditor who has no notice and becomes aware of the meeting the day after it took place would have to submit his claim within 29 days of the meeting.

The judgement examines the CVA terms' construction in detail and supports the view of the creditor in question, Gold Fields Mining LLC ("GFM"), with Mummery LJ concluding:

"In sum, the Supervisors' suggested construction of paragraph 23.5 as imposing an absolute bar on claim forms lodged by a creditor without notice more than 28 days after becoming aware of the creditors' meeting is (a) conceded not to be absolute in practice and (b) makes less than absolute sense. Like the Chancellor I prefer GFM's construction: it fits more comfortably into the scheme, structure and language of the paragraph and it makes good sense."

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Pre-pack administrations, where the business of an insolvent company is sold as soon as the administrators are appointed, often to the company's management or shareholders, are under scrutiny.

• The Business and Enterprise Select Committee (Chairman - Peter Luff MP) examined the issue when Stephen Speed, the head of the government's Insolvency Service, appeared to be questioned on 27 January (video here - see 38mins 50secs).
• BBC Radio 4's File on Four recently illustrated creditors' concerns about companies in the printing and retail industries where pre-packs had occurred (transcript here).
• BBC 2's Newsnight is shortly also to explore the sales of assets to failed companies' directors or their associates through pre-pack administrations.
• Press articles frequently refer to the effect of insolvencies on creditors and report surprise that businesses can be allowed apparently to continue after dumping creditors.

Two separate issues should not be confused.

Firstly, creditors suffer financial loss in an insolvency because the company has failed. The pain may feel worse if the management thought to be responsible for the loss appears somehow to benefit. But the fact remains that it is the company failure that causes the loss.

Secondly, insolvency procedures operate in the interests of creditors. Of course they must work properly to produce the best result, but that is why insolvency practitioners are highly trained, licensed, strictly regulated and, as officers of the courts, obliged to act properly. Insolvency is a complex process where a highly specialised area of law confronts commercial reality. Explanation is therefore crucial and the regulators emphasise transparency, for example in Statement of Insolvency Practice ("SIP") 16  "Pre-packaged Sales in Administrations", which came into effect for adminstrators appointed after 1 January 2009.

Until the recession, few people in business felt the need to think about insolvency, but understanding the insolvency process and its safeguards may help creditors appreciate that the procedures and the practitioners really do act in the interests of the creditors.

How can it be right that the directors appoint the administrator to sell the assets back to them?

The administrator acts for and has his remuneration fixed by the creditors. Of course he may have been introduced by the directors, but they have a legal obligation to call in an insolvency practitioner as soon as it becomes necessary.

Why were the assets sold so cheaply?

The administrator's job is to get the best result for the creditors (if the company can't be saved). One of his skills is selling distressed businesses and assets. Sometimes there may have been no obvious marketing, in which case the administrator will have commissioned an independent valuation and taken specialist professional advice to get the best deal.

At the time of the pre-pack sale (or shortly afterwards when they find out about it), creditors may not know enough about the precise circumstances to make a fully informed judgement, which is why the administrator is required by SIP 16 to explain the sale to creditors as soon as practicable. Ideally they should learn about it from the administrator immediately, with a full explanation so that even if not pleased about their losses, they are at least satisfied that the insolvency procedure is achieving the best recovery.

What if I'm not convinced it was the best deal?

Remember that it must be the best result for all creditors, including some who may have different interests; but, if you're not satisfied, engage in the process.

Talk to the administrator - if you know something he doesn't, he'll want to hear from you.

Raise your concerns at the creditors' meeting - other creditors may share your views or could have a different perspective.

To be involved in monitoring the administration and assisting the administrator to get the best result for creditors, get yourself elected onto the creditors' committee, but be aware that your duties there will be to act in the interests of all creditors rather than just yourself or an interest group.

It may be possible to nominate another insolvency practitioner to be liquidator once the administration ends, for an independent professional review of the administration. If not, and you still have concerns, you should consider seeking specific advice from an insolvency practitioner or insolvency lawyer on other remedies such as applying to court.

If you think the administrator has done something wrong you may want to complain to his regulator (the administrator has to tell you who that is - there are several), but that is more likely to lead to sanctions against the administrator than to things being put right in your particular case.

Why should the directors get away with it?

Buying a business from an administrator isn't itself a bad thing. But if you know of impropriety that went on before the administration, tell the administrator. He can then take any necessary action for the benefit of the creditors.

Are pre-packs a good thing?

Independent research into pre-packs by Dr Sandra Frisby of Nottingham University has established that in over 90% of pre-packs all the jobs in the business are saved, compared to only about 60% in other insolvency business sales.

There is no evidence that returns to unsecured creditors are better in pre-packs than in those administrations where the administrator secures funding to allow the company to continue to trade for a period while he markets and sells the business. Pre-packs can, however, reduce the risk of value destruction as a result of the insolvency process; they often realise more than simple liquidation; and they almost invariably cost less than a period of trading followed by a business sale.

The crucial point though is that in any particular case, the insolvency practitioner has to get the best result for the creditors as a whole. There is no evidence that this is not happening in the vast majority of cases. If the administrator has chosen to use a pre-pack it is because he believes that it is in the best interests of the creditors as a whole that he should do so.

Once the administrator has been appointed, the creditors' money has already been lost; and if the alternative is worse, using a pre-pack is undoubtedly a good thing.

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GILD , the Global Insolvency Law Database, is a resource dedicated to all aspects of credit and debt, including debtor and creditor rights, the creation and enforcement of security interests, corporate restructuring, bankruptcy, reorganization and liquidation.

At the heart of the World Bank's Insolvency Initiative, GILD is designed to promote understanding and awareness of best practices by presenting information on the latest developments and systems adopted or proposed in countries and regions throughout the world. GILD contains reports on cutting edge innovations, the World Bank Principles and Guidelines for Effective Insolvency and Creditor Rights Systems, explanatory overviews by experts in the field, and excerpts from relevant legislation.

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This post was prompted by the following question on LawGuru.com:

Can someone outside of the European Union start Bankruptcy Proceedings in Great Britain or make a claim in existing British Bankruptcy Proceeedings against an Individual or a Company?

The short answer is "Yes, and yes"!

Foreign creditors are fully recognised in the UK jurisdictions of England and Wales, Scotland and Northern Ireland and, whilst they may benefit from local professional assistance, they can certainly present insolvency petitions and claim in UK insolvencies.

These existing rights were confirmed in England and Wales and in Scotland by The Cross-Border Insolvency Regulations 2006 (and Northern Ireland is planning to introduce similar regulations during 2007):

Article 13. Access of foreign creditors to a proceeding under British insolvency law 1. Subject to paragraph 2 of this article, foreign creditors have the same rights regarding the commencement of, and participation in, a proceeding under British insolvency law as creditors in Great Britain. 2. Paragraph 1 of this article does not affect the ranking of claims in a proceeding under British insolvency law, except that the claim of a foreign creditor shall not be given a lower priority than that of general unsecured claims solely because the holder of such a claim is a foreign creditor.

3. A claim may not be challenged solely on the grounds that it is a claim by a foreign tax or social security authority but such a claim may be challengedó

(a) on the ground that it is in whole or in part a penalty, or

(b) on any other ground that a claim might be rejected in a proceeding under British insolvency law.

The regulations are the British enactment of the UNCITRAL Model Law on Cross-Border Insolvency.

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