UK Law and Practice Contributed by: Fergus Wheeler, Paul Yin, Tracy Liu and Medha Vikram, Latham & Watkins
and customers as well as certain bank and building deposits that are not ordinary prefer - ential debts. • Holders of floating charge security, according to the priority of their security. This would include any security interest that was stated to be a fixed charge in the document that created it but which, on proper interpretation by the court, was rendered a floating charge. However, before distributing asset realisations to the holders of floating charges, the “prescribed part” (a ring-fenced fund of up to GBP800,000 for the benefit of unsecured creditors) must, subject to certain exceptions, be set aside for distribution to unsecured creditors. • Debts and liabilities: (a) provable debts of unsecured creditors and (to the extent of any unsecured shortfall) secured creditors, in each case including accrued and unpaid interest on those debts up to the date of commencement of the relevant insolvency proceedings; (b) interest on the company’s unsubordinated debts in respect of any period after the com - mencement of liquidation or after the com - mencement of an administration which has been converted into a distributing administra - tion; and (c) non-provable liabilities, being liabilities that do not fall within any of the categories above and therefore are only recovered in the (unusual) event that all categories above are fully paid (this does not include currency conversion claims). • Shareholders: if, after the repayment of all unse - cured creditors in full, any remaining funds exist, these will be distributed to the shareholders of the insolvent company. 7.3 Length of Insolvency Process and Recoveries In general terms, the longer an insolvency process takes the greater the losses incurred by creditors. A pre-pack enforcement executed at the holding com - pany level will typically protect the wider operating group from the taint of insolvency and preserve value in its operating subsidiaries. Trading administrations will require funding either from the business itself or from the group’s creditors while the business is mar -
keted. Depending on the group in question, this is usually for a limited period while the insolvency office - holder explores disposal opportunities. 7.4 Rescue or Reorganisation Procedures Other Than Insolvency See 7.9 Dissenting Lenders and Non-Consensu- al Restructurings for descriptions of schemes of arrangement and restructuring plans. 7.5 Risk Areas for Lenders See 7.6 Transactions Voidable Upon Insolvency for descriptions of antecedent transactions that may be challenged by an insolvency officeholder of the bor - rower/guarantor. English law does not contain a con - cept of lender liability for deepening the insolvency of a borrower through further lending. Liability may arise if a lender acts as a shadow director of the borrower (ie, a person in line with whose directions or instruc - tions the directors of a company are accustomed to act) but this threshold is a high one and requires a lender to act outside of its usual lending capacity. 7.6 Transactions Voidable Upon Insolvency Under English insolvency law, certain transactions can be challenged if a company enters administration or liquidation within a specific period after entering into the transaction. Transactions at an Undervalue A liquidator or administrator can apply for a court order to set aside a transaction at an undervalue. The transaction can be challenged within a period of two years from its entry if at the time of the transaction or as a result of it, the company was unable to pay its debts (as defined in Section 123 of the IA86) unless a beneficiary of the transaction was a connected per - son, in which case there is a presumption of insol - vency and the connected person must demonstrate that the company was not unable to pay its debts at the time of the transaction or became unable to do so as a result of the transaction. A transaction may be set aside as a transaction at an undervalue if the company made a gift to a person, received no consideration or received significantly less value than the company gave. However, a court
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