How can a bank appoint an Insolvency Practitioner?

When faced with a struggling borrower, banks wield significant influence through the appointment of insolvency practitioners. By strategically selecting these practitioners, banks not only protect their financial interests but also contribute to the orderly resolution of insolvency proceedings. 

This process involves careful consideration of the practitioner’s expertise, track record, and alignment with the bank’s objectives. Through prudent decision-making and effective management, banks ensure that insolvency proceedings are conducted in a manner that maximizes recovery for creditors while minimizing disruption to business operations. 

Can a bank appoint an Insolvency Practitioner?

Banks can appoint an insolvency practitioner. In fact, they often play a significant role in insolvency proceedings as major creditors. When a company becomes insolvent or fails to repay a loan, banks with qualifying floating charges (QFCs) have the right to choose their insolvency practitioner, as outlined in the Insolvency Act 1986.

Depending on the specific circumstances, the bank may appoint an insolvency practitioner to act as an administrator or an administrative receiver. The choice between these options typically depends on the creation date of the floating charge.

If the floating charge was established after September 15, 2003, the bank may appoint an administrator. Administrators are appointed to manage the affairs of the insolvent company with the objective of achieving a better outcome for creditors as a whole, which may include rescuing the company as a going concern, achieving a better result for creditors than in a liquidation, or realizing property to make a distribution to secured or preferential creditors.

If the floating charge was created before September 15, 2003, the bank may appoint an administrative receiver. Administrative receivers are appointed to realize assets covered by the floating charge in order to repay the debt owed to the secured creditor (in this case, the bank).

In either case, the insolvency practitioner appointed by the bank will oversee the insolvency process, manage the company’s affairs, realize assets, and distribute proceeds to creditors in accordance with the relevant legal and regulatory requirements.

 

How does the process of banks appointing their own insolvency practitioner work?

Facilitating a smooth transition during financial distress, the process of banks appointing their own insolvency practitioner is pivotal. By understanding the intricacies of this procedure, banks can assert control, protect their interests, and navigate the complexities of insolvency with greater clarity and efficiency.

Triggers for Bank Intervention:

a. Loan Defaults: When a company fails to repay its loan according to the terms specified in the loan agreement, it triggers default clauses. These clauses often grant the bank certain rights, such as the ability to appoint an insolvency practitioner to protect its interests.

b. Company Distress: Banks may also intervene when a company shows signs of financial distress, such as consistently late payments, declining profitability, or an inability to meet financial obligations. In such cases, banks may proactively appoint an insolvency practitioner to assess the company’s financial situation and explore potential options for restructuring or insolvency proceedings.

The Legal Framework:

a. Insolvency Act 1986: 

This legislation governs insolvency proceedings in the UK and provides the legal framework within which banks can appoint insolvency practitioners. Section 245 of the Insolvency Act 1986 grants banks the right to appoint an insolvency practitioner under certain circumstances, particularly when holding qualifying floating charges (QFCs) over a company’s assets.

b. Qualifying Floating Charges (QFCs):

i. Pre-September 2003 QFCs: These floating charges allow banks to appoint administrative receivers in the event of default. Administrative receivers are tasked with realizing assets covered by the floating charge to repay the debt owed to the bank.

ii. Post-September 2003 QFCs: Banks with floating charges created after September 15, 2003, have the right to appoint administrators instead of administrative receivers. Administrators are appointed to manage the affairs of the insolvent company with the objective of achieving the best possible outcome for creditors as a whole.

The Appointment Process:

a. Notice: Before appointing an insolvency practitioner, the bank must provide formal notice to the company directors and any other relevant parties. This notice informs them of the bank’s intention to appoint an insolvency practitioner and the reasons for doing so.

b. Court Application: Following the notice period, the bank may apply to the court for an appointment order. This application includes justifications for the appointment, such as evidence of loan defaults or the company’s financial distress. The court reviews the application and, if satisfied, issues an appointment order authorizing the bank to appoint an insolvency practitioner.

c. Creditor Meetings: Once the insolvency practitioner is appointed, they convene meetings with creditors to discuss the company’s financial situation and potential options for resolution. These meetings provide creditors, including the bank, with an opportunity to voice their concerns, negotiate repayment terms, or vote on proposed restructuring plans.

What Happens Afterwards?

After the appointment of an insolvency practitioner by the bank, several steps are typically taken to manage the insolvency process and achieve the best possible outcome for all stakeholders involved. Here’s what typically happens afterwards:

Assessment and Management:

The insolvency practitioner begins by conducting a comprehensive assessment of the company’s financial situation. This involves reviewing financial records, assessing assets and liabilities, and understanding the company’s operational structure.

Based on their assessment, the practitioner may determine that it’s necessary to take over operational management of the company. This could involve making strategic decisions to preserve value, such as renegotiating contracts, reducing costs, or restructuring the business.

Throughout this process, the practitioner communicates regularly with creditors, stakeholders, and company management. They discuss plans for restructuring the company to improve its financial viability or, if restructuring is not feasible, plans for an orderly liquidation.

Asset Realization and Distribution:

Once the decision is made to liquidate assets to repay creditors, the practitioner oversees the process of asset realization. This involves identifying and valuing assets, preparing them for sale, and marketing them to potential buyers.

Proceeds from the sale of assets are then distributed to creditors according to a predetermined hierarchy. Secured creditors, such as the bank holding a floating charge, are typically first in line to receive repayment. Preferential creditors, such as employees owed wages, are next, followed by unsecured creditors.

Legal Proceedings and Finalization:

In some cases, legal proceedings may be necessary to resolve disputes or recover funds owed to the company. The insolvency practitioner may initiate legal actions against debtors who owe money to the company, or defend against legal claims brought by creditors or other parties.

Once all assets have been realized, funds are distributed to creditors, and any legal proceedings have been resolved, the practitioner prepares final reports detailing the administration of the insolvency estate. These reports outline how assets were realized, how funds were distributed, and any outstanding matters that need to be addressed.

With approval from creditors and the court, the insolvency proceedings are formally concluded, and the company is dissolved or placed into liquidation. Any remaining assets are distributed to shareholders, if applicable, and the company ceases to exist as a legal entity.

Can a bank appoint an administrator without a court order? 

The bank can name an administrator without a court order, but they must provide a two-day notice to the holder(s) of any preceding floating charge. 

Filing a copy of the notice of intent to appoint an administrator with the court initiates an interim moratorium period, shielding the company from creditor actions.

At times, major banks may designate administrators from a centralised panel of insolvency practitioners. These insolvency practitioner firms would have undergone a competitive tender process for panel inclusion, but there are limitations on appointing an administrator without a court order.

For instance, an appointment is not allowed if:

• An administrative receiver or provisional liquidator has already been designated.
• The company is already in liquidation.

After making an appointment, it must be communicated to the court, accompanied by a declaration confirming the possession of an enforceable floating charge. Furthermore, the secured creditor must provide their approval before enforcing any security over assets. 

Vanguard Insolvency serves as a cornerstone within the Begbies Traynor Group, a leading business recovery firm in the UK. Spanning numerous offices nationwide, our seamless network enables swift consultations with licensed insolvency practitioners, often on the same day. 

With over 100 offices strategically positioned across the UK, our clients have access to expert and confidential advice wherever they are located. This extensive reach ensures th