UK Law and Practice Contributed by: Kate Stephenson and Zoe Stembridge, Kirkland & Ellis
Secured Creditors Secured creditors are entitled to receive realisations from their secured assets (minus costs of realisa - tion and, in the case of assets secured by a floating charge, after payment of expenses of the proceedings, preferential claims and the prescribed part set aside for unsecured creditors). To the extent that secured creditors’ claims are “under-secured”, they rank with unsecured creditors in respect of any shortfall. Unsecured Creditors In a CVL, creditors are invited to nominate the liquida - tors; in a compulsory liquidation, the Official Receiver will act as liquidator unless a third-party insolvency practitioner is appointed at the invitation of the Offi - cial Receiver or at the instigation of a creditor rep - resenting 25% in value of the creditors. Unsecured creditors are entitled to share in the prescribed part (maximum GBP800,000, from realisation proceeds of assets secured by a floating charge). Aside from the prescribed part, unsecured creditors only receive a distribution if/once higher ranking creditors have been repaid in full.
Third-Party Releases Liquidation is not a compromise or restructuring mechanism. The liquidator has no power to release claims that creditors may have against third parties without the relevant creditor’s consent. However, a liquidator can compromise or settle the company’s own claims against a third party. 6. Cross-Border Issues in Insolvency 6.1 Sources of International Insolvency Law The UK has adopted the UNCITRAL Model Law on Cross Border Insolvency via the Cross-Border Insol - vency Regulations 2006. This permits recognition of the international proceedings and assistance for foreign insolvency officeholders (including a mora - torium), upon application to the court, provided the proceedings are in a jurisdiction where the debtor has its centre of main interest (COMI) or an establishment. Section 426 of the Insolvency Act 1986 also enables UK courts to assist courts in certain designated coun - tries and territories in insolvency and restructuring proceedings. Recognition and assistance may also be available under the common law based on the prin - ciples of modified universalism and comity. Critically, however, such recognition/assistance does not necessarily extend to recognition/enforcement of the plan of reorganisation with the foreign proceed - ings. Owing to the so-called “Rule in Gibbs”, English courts consider that, where a contract specifies that it is governed by a particular country’s law, it can - not be compromised or discharged by insolvency proceedings under a different law unless the affected parties have taken part in the proceedings or other - wise submitted to them (eg, by voting) or were present in the foreign jurisdiction when the proceedings were commenced. A parallel UK process may therefore be required to compromise English law debt (or share - holder rights) if not all stakeholders are “subject” to the foreign proceedings and if parties require certainty. The UK has adopted the Cape Town Convention and related Aircraft Protocol, which provide certain and uniform rules relating to the purchase, sale, lease and financing of aircraft objects.
Exercise of Creditors’ Rights Creditors’ rights are as follows.
• Compulsory liquidation: no action or proceedings can be continued or raised against the company except with the court’s permission, although there is no stay on enforcement of security. • Voluntary liquidation: there is no moratorium on legal proceedings against the company – it is for the liquidators (among others) to apply for a stay to prevent the continuation of legal proceedings and enforcement of security. • Retention of title: creditors may take steps to repossess assets that are not actually owned by the company, such as goods subject to a retention of title clause. Properly drafted, a retention of title clause will survive an insolvency filing. Set-Off Mandatory, automatic insolvency set-off applies in liquidation.
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