Useful Glossary of Restructuring Terms May 2010
GLOSSARY OF TERMS Description Adjudication A dispute resolution procedure imposed on all "qualifying" construction contracts. Administration A corporate rescue procedure run for the benefit of all creditors under which the company's assets are protected by virtue of a statutory 'moratorium' against all forms of creditor action unless a creditor obtains the permission of the court or the administrators. Example: Unless permission of the court or the administrators is given, a landlord cannot take forfeiture proceedings (or effect peaceable re-entry) against a tenant in administration nor is the holder of a fixed charge allowed to realise the property as mortgagee. The availability of the moratorium can be a very important part of the decision to appoint especially if the ability to appoint an administrative receiver is also available (see below). For example, an appointment in respect of a retail operator with a portfolio of leasehold shops is likely to be an administration in order to preserve the leases while a buyer for the business is found. The administrators have the power to trade the insolvent business and may look to find a buyer for it. Administrations are the procedure most commonly associated with the 'pre-pack' phenomenon (see page 7) Administrators have a general duty to act in the interest of all creditors (compare this with the administrative receiver whose primary duties are to his appointor). Administrators have one statutory function with three objectives, which they move through in descending order. If the first cannot be achieved they move on to the second. If the second cannot be achieved they move on to the third. They can only pursue the third if it does not unnecessarily harm the interests of the creditors of the company as a whole. The objectives are:- 1. to rescue the company as a going concern. This means the survival of the original corporate entity not just the business inside the corporate entity. 2. Achieving a better result for the company s creditors as a whole than would be likely if the company was to be wound up. 3 Realising property to make a distribution to one or more secured creditors. Administrative receivership A process under which the holder of a floating charge (usually a bank), which pre-dates 15 September 2003, appoints a receiver-manager to sell the company's assets for maximum value in order to pay off the debt secured. This procedure has been largely superseded by administration as a result of changes in the law. Administrative receivers owe a duty only to the person appointing them. This enables them to realise the assets of the company in a way which most suits the repayment of the debt owed to their appointor. Arrestment In Scotland, a step which a creditor can take to secure a debt by freezing, in the hands of a third party, any items or funds belonging to the debtor, for example, money held in a bank account. 1
Assignment The transfer from one party to another of the benefit of a contract. The benefit is usually the right to have a contract performed. The burden (e.g. obligation to pay) does not transfer. Assignment may be used when a contract (i.e. an asset) is used as security for a loan. In a property transaction, for example, assignment is the legal process by which the benefit of warranties and guarantees held by a seller are passed to a buyer. Attachment In Scotland, a step which a creditor can take to secure a debt against the debtor's moveable property. The affected property can ultimately be removed and sold at auction in satisfaction of the debt. Bankruptcy England and Wales The grant of a court order declaring that an individual is insolvent and unable to pay his/her debts. A creditor of the bankrupt can apply for the bankruptcy order which, if granted, orders the compulsory administration of the bankrupt's affairs so that its assets can be fairly distributed among its creditors. When the order is first granted the bankrupt's property is placed in the hands of the official receiver who must call a meeting of creditors to appoint a trustee in bankruptcy or become trustee themselves. On the appointment of a trustee in bankruptcy any property which is wholly owned by the bankrupt automatically vests in the trustee. The position is different for jointly held property (e.g. the matrimonial home) where only the bankrupt's beneficial interest in the property passes to the trustee in bankruptcy. Scotland In Scotland the procedure for personal insolvency is similar to that in England and Wales but is known as sequestration. As in England and Wales the procedure can be commenced by a petition presented by a creditor or by the debtor themselves. On the award of sequestration, a trustee in sequestration (this role is similar to that carried out by the official receiver in England and Wales) is appointed with the task of preserving the debtor's estate and calling a trustee vote (analogous to the meeting of creditors in England and Wales). A trustee in sequestration is then elected to realise and distribute the assets of the debtor. As with the trustee in bankruptcy, the debtor's estate vests in the trustee in sequestration. In Scotland, the Accountant in Bankruptcy is the court representative who is responsible for overseeing the licensed insolvency practitioners appointed as trustees. The Accountant in Bankruptcy will also act as trustee in insolvencies where there are insufficient funds to pay a private insolvency practitioner. Certificate(s) of practical completion Certificates take many forms but are particularly relevant because they are, generally, a trigger for payments/release of monies/grant of leases/commencement of lease terms. Should the employer's agent/contract administrator (engaged by the employer as an independent third party to manage the building contract) negligently issue certificates, the employer would have grounds to commence an action if they suffer loss or damage caused by the employer's agent/contract administrator's negligence. This may also extend to others incurring loss or damages (e.g. the bank) when a collateral warranty is in existence. An example of this would be if the bank was to suffer loss because it relied on the employer's agent/contract administrator's certificates to release funds and the employer's agent/contract administrator had negligently certified the payment as due to the contractor 2
Collateral Warranties These are used to create direct contracts between contractors/consultants/subcontractors and a bank or other interested party. The creation of a direct contractual link can allow the bank to bring a claim against the contractor/consultant/subcontractor in the event of a defect arising causing loss to the bank through some act or default of the warrantor. Company Voluntary Arrangement (CVA) A binding form of agreement between a company and its creditors under which, typically, the creditors agree to a reduced or rescheduled debt arrangement which allows the company to survive. Sometimes used in conjunction with the administration procedure. Debenture A term used to describe a document which contains a promise to pay a debt (a "covenant to pay") and also providing different types of security (usually both fixed and floating charges over the whole of the debtor's assets and undertaking) in respect of that debt. Design and build Term normally used for a contractual arrangement whereby a contractor designs and builds the whole of the works. The point of significance here is that, in the event of a problem, there is a single point of responsibility (liability) for design and construction of the project and that is the contractor. In reality the market has insisted on a further layer of risk mitigation and taken warranties from the consultants and the principal sub-contractors. Direct agreements, duty of care letters These are like Collateral Warranties in that this is another way to create direct contracts between contractors/consultants/sub-contractors in favour of a funder or other interested party. Disclaimer The right for a liquidator (where the tenant is a company) or a trustee in bankruptcy (where the tenant is an individual) to terminate a lease unilaterally. The purpose of disclaimer is for the better winding up of the company or the better administration of the bankrupt's estate (to avoid the liquidator or trustee in bankruptcy having to wait for the expiry of the lease before being able to finish their work). This means that a landlord can claim in the liquidation or bankruptcy for the losses it suffers in consequence of the disclaimer of the lease. Note: this does not apply in Scotland. Distraint An ability for a landlord (usually through a bailiff) to take possession of tenant's chattels and sell them in satisfaction of rent arrears. In Scotland, a landlord may take similar steps, known as Attachment. Empty Rates A liability of the person with the right to occupy business premises to pay business rates on those premises even if the premises are actually vacant. There are some very limited reliefs. It is worth noting that companies in administration are not liable to pay rates on empty buildings which they own or have a current lease over. The consequence that they will take on the liability for empty rates is a factor for landlords in deciding whether or not to forfeit a lease. 3
Final account A financial statement prepared at the end of a building contract, usually after all works are complete and defects have been rectified. It shows all sums due to the contractor under the contract. The final account is normally prepared by the contractor and submitted to the employer's agent / contract administrator for approval. It is the contractor's statement of the total amount he believes is due under the contract. Final Certificate Certificate issued at the conclusion of the works, following the making good of all defects and the finalisation of the contractor's final account. The Final Certificate is intended to mark the total conclusion of the project and all matters arising from it. Standard forms of contract normally prevent both the employer and the contractor raising new claims following the issuing of the Final Certificate (other than for claims for latent defects). Fixed Charge A charge over a particular asset where the chargee controls any dealing or disposal of the asset by the charger. A fixed charge ranks before a floating charge in the order of repayment under an insolvency process. Fixed charge Receivership See LPA Receivership. Floating Charge A charge taken over all the assets or a class of assets owned by a company from time to time, such as stock in trade. The advantage of a floating charge is that (before insolvency) it allows the charged assets to fluctuate during the course of a company's business without the consent of the chargeholder. The floating charge crystallises if there is a default or similar event. At that stage, the floating charge is converted to a fixed charge over the assets which it covers at the time the default occurs. Depending on when the floating charge was created, the chargeholder may be able to appoint an Administrative Receiver, or an Administrator. Forfeiture A right for a landlord to terminate a lease by repossessing the property. This is usually only available to a landlord where the lease is in writing and contains an express forfeiture clause. The normal events which trigger forfeiture are non payment of rent or other breach of the lease. Generally a tenant will have a right to go to court for equitable relief (i.e. asking the Court, which has a discretion, not to allow the forfeiture) should a landlord take forfeiture proceedings. Where rent is in arrears the landlord of commercial property can terminate the lease by physically re entering the property and changing the locks. For any other forfeiture the landlord has to go through Court proceedings by way of the "section 146 notice" procedure (section 146 Law of Property Act 1925). The landlord has to remember that forfeiture terminates the lease (so where the landlord hasn't got a new tenant lined up at the same or higher rent it needs to think carefully before taking forfeiture action, especially if there is a guarantee which it can pursue). Where the tenant is in administration a landlord cannot forfeit a lease without the consent of the administrators or leave of the Court. However, an aggrieved landlord can apply to the court for leave to take such action and where the purposes of the administration have been substantially fulfilled (e.g. the business has been sold as a going concern) the landlord could be successful. 4
Guarantee An obligation in a document by which a third party covenants that the main contracting party (e.g. a tenant) will fulfil its obligations under that contract meaning if the original contracting party is in breach the covenanting third party makes good the losses. A well written guarantee of a tenant's obligations under a lease will provide that the landlord can make the guarantor take a new lease on the same terms if the original lease is terminated (say by forfeiture). Inhibition In Scotland, a prohibition at the instance of a creditor which prevents the debtor from selling or granting further securities over heritable property. Insolvency Practitioner (IP) A person who is licensed by a professional body (recognised by statute) to act as an insolvency practitioner in control of a formal insolvency process: an Administrator; a Liquidator; an Administrative Receiver; or the Supervisor of a CVA. Commonly referred to as an "IP", they are usually employed by (or a partner in) a firm of accountants specialising in insolvency and, for practical reasons, usually take appointments with one or more other IPs within their firm. Irritancy A right for the landlord to terminate a lease in Scotland prematurely because of the tenant's breach of contract. Irritancy brings to an end not only the lease but also all rights deriving from it, such as the rights of the sub tenant or the person who holds security over the tenant's interest in a registered lease. In the case of monetary breaches a prescribed form of notice must be served on the tenant allowing it a prescribed period to rectify the breach. The Irritancy provisions may be invoked only if payment is not made. In the case of non monetary breaches, the landlord will be entitled to irritate the lease only if a fair and reasonable landlord would do so. Unless the tenant voluntarily accepts that the landlord has irritated the lease and vacates the premises the landlord must obtain a court order to take back possession. The Court will normally grant that order in the case of failure to pay rent (or any other monetary sum due) but in other cases the Court will only grant the order where it considers a fair and reasonable landlord would terminate the lease. This is the only statutory relief for a tenant in Scotland. If the tenant is in administration an attempt to irritate a lease cannot be made without the consent of the administrators, or leave of the Court. However, an aggrieved landlord can apply to the Court for leave to take such action and where the purposes of the administration have been substantially fulfilled (e.g. the business has been sold as a growing concern) then the landlord could be successful. Liquidated and ascertained damages (LAD'S) Construction contracts frequently provide for the contractor to pay a specified sum per day, week or month if the works are not completed by the date for completion. The level of damages must be a genuine pre-estimate (at the time the contract is entered into) of loss, if not it may be deemed a penalty clause and unenforceable. 5
Liquidation (ie winding up) The process by which a company's life is brought to an end by realising all of its assets and distributing them to shareholders (if solvent) or creditors (if insolvent). The liquidator is also obliged to examine (and, if appropriate, take action in relation to) the directors' conduct. In an administration or administrative receivership it is possible that the company can survive and come back out of administration/administrative receivership. Once a company is in liquidation it stays there until it is wound up. The liquidator has the power to disclaim onerous contracts and onerous leases 1. This power is not to allow the liquidator to avoid the debts of a company, but to better promote the realisation of the company's assets. Liquidator The Official Receiver or an Insolvency Practitioner appointed to administer the Liquidation of a company or partnership. LPA Receiver A receiver appointed under the Law of Property Act 1925. LPA receivers are appointed by the lender under a fixed charge of land (owned by a company or individual), and their appointment can only extend to the subject matter of the charge i.e. the "bricks and mortar" and not chattels. It is possible to have an appointment of an LPA receiver running concurrently with the appointment of administrative receivers or administrators. However, where an administrator is appointed first, any purported attempt to appoint LPA receivers will be caught by the moratorium. If an LPA receiver is appointed before administrators are appointed, the administrators can require the LPA receivers to be removed from office. The LPA receiver owes a primary duty to the person appointing him/her. The powers of an LPA receiver derive from the Law of Property Act 1925. Those powers are strictly limited and include no power to sell the property in question. As the powers under statute are strictly limited they can be extended by the legal charge, to include a power to sell the property, and generally are. However it is vital to check for the terms of the legal charge at the outset to make sure that the power of sale exists. LPA receivers do not exist in Scotland as the Law of Property Act 1925 does not apply in Scotland. Mortgagee in possession This is where a lender under a legal charge physically takes possession of a property. Possession by a mortgagee can occur not only where the mortgagee goes into possession but also where their receiver takes possession specifically as agent of the lender. The mortgagee will be deemed to be in possession of an investment property where the mortgagee collects the rents directly. The mortgagee can sell land under the powers contained in a legal charge without being mortgagee in possession but will need to be in possession to be able to honour vacant possession obligations in any sale contract. Being mortgagee in possession brings with it possible liabilities under the occupiers liability legislation and environmental legislation. 1 There is no equivalent provision for companies liquidated in Scotland. However it is worth noting that in both England and Wales, and Scotland, certain types of transaction may be challenged by a liquidator or administrator where at an undervalue or where there are preferences. 6
Net contribution If an employer suffers loss or damage, caused by a problem with a construction project, more than one party may be responsible for that loss or damage. The employer may sue any one of the parties at fault. If the employer is successful, the party at fault will be 100% liable for the employer's loss and damages, irrespective of their actual share of the blame. A net contribution clause creates a contractual exception to the rule that a party at fault will be 100% liable for the employer's loss. A typical clause states that where two or more parties are each jointly liable for the same loss or damage, the liability of a party will be limited to the amount which would be apportioned to that party by a court on a fair and reasonable basis. Performance bond There are various forms of performance bond. In its basic form it is a right to call on the surety (bondsman) for a sum of money The circumstances giving rise to the right to call on a bond are particular to each bond. An 'on demand' bond is normally payable on demand (i.e. calling on the bond), whereas a 'default bond' will require an event of default to occur before the bond can be called. Practical completion Practical completion represents the stage of the works when they are capable of beneficial use even though some minor defects or minor items are incomplete. Practical completion can occur even though the work subsequently proves to be incomplete by reason of serious defects which appear at a later date. The importance of practical completion is normally threefold: firstly, the contractor's liability to pay liquidated damages normally ceases once the works are practically complete. Secondly, the defects liability period starts to run, during which the contractor must make good the finishing and incomplete items before the issue of the certificate of making good defects and final certificate. Thirdly, one half of retention monies is normally released when practical completion has been achieved. Normally, the terms of the contract require the employer's agent / contract administrator to issue a certificate of practical completion. The issuer is liable if practical completion is certified when in fact the works had not achieved a state of practical completion. Pre-Pack Sale This is a sale which is structured, negotiated and agreed upon by "an IP in waiting" and the buyer before the proposed insolvency procedure (invariably administration or administrative receivership) and the appointment of the IP. Professional indemnity insurance (PI) Professional indemnity insurance is the insurance available to organisations performing professional services. PI insures against liability for professional negligence, for example liability arising from defective design or negligent advice. It is also available to contractors undertaking design and build contracts as they perform professional services when designing the works. Rent Deposit A sum paid by a tenant for the landlord to be able to access and use should the tenant be in breach of the lease, specifically should there be rent arrears. The rent deposit paid should be governed by the terms of a specific rent deposit deed. Under the terms of the deed the money is usually ring fenced so that it is not available to the landlord until the rent deposit is triggered, and, if not triggered, not available to the tenant until the end of the lease. 7
Retention A sum retained by the employer from amounts paid to the contractor during the progress of works, as security for the due performance by the contractor of his obligations. Retention money is usually released half on practical completion, and half on the making good of defects. The employer is sometimes under a contractual obligation to pay the retention money into a separate trust account, so it is not available for the employer's creditors. Normally, the issuing of a certificate of practical completion triggers the first release of retention money. The certificate issuer is liable if practical completion is certified and retention is released when in fact the works had not achieved a state of practical completion. Retention of Title/ROT A contractual provision by which the seller of goods retains title notwithstanding delivery of the goods to the buyer (reversing the position under the Sale of Goods Act 1979) until payment has been received for those goods (so-called 'simple' ROT) or for all goods supplied to the buyer by the seller (so-called 'all-monies' ROT). ROT clauses have to be carefully drafted so as to avoid being classed as registrable security and therefore void against an administrator or liquidator for lack of registration. The question of incorporation into the contract, identification of goods and destruction of their identity by mixing are also major issues in their effectiveness. Sale by Mortgagee In England and Wales Mortgagees have powers under a legal charge to take possession of property and/or to sell it as mortgagee. Note: The mortgagee can dispose of property without being "mortgagee in possession" A sale by a mortgagee (or the mortgagee entering into the transfer of the property) might be useful to sell a property free of subsequent charges or incumbrances (so as to give 'clean' title to a buyer, where the administrator or receiver cannot). Where the mortgagee sells, or enters into the transfer, the mortgagee still has to discharge its usual duties to achieve the best price reasonably obtainable in the market at the time. It will therefore need protective valuation advice. In Scotland In Scotland mortgagees hold Standard Securities which are generally enforced by the holder of the security selling the real estate over which the Standard Security has been granted. There are three ways to enforce the Standard Security:- serving a Calling up Notice; serving a Notice of Default; petitioning the Court under section 24 of the Conveyancing and Feudal Reform (Scotland) Act 1970. The most common way to enforce a Standard Security is by serving a Calling up Notice which will contain a two month period of notice upon the expiry of which the creditor can take possession of the property and sell. The sale can be by private bargain or auction but in either event the property must be publicly advertised for sale and reasonable steps taken to obtain the best price. The holder of the Standard Security can also take possession of the land on enforcement and collect rents, or lease the land (but only for a maximum period of seven years unless a Court order is obtained authorising leasing for a longer period). 8
Scheme of Arrangement This is a compromise or arrangement between a company and its creditors or members. It is similar to a CVA in many respects although it must be sanctioned by the court. The process is more cumbersome than a CVA and usually only used for large companies and those with a significant number of classes of creditor or shareholder. Section 6 Notice This is a notice that can be served by landlords on sub-tenants when the intermediary tenant defaults on payment of rent. Upon service of a Section 6 notice (section 6 of the Law of Distress Amendment Act 1908) the sub-tenant is obliged to pay its rent directly to the head landlord, missing out the intermediary tenant. This does not apply in Scotland. Section 17 Notice A notice that must be served by a landlord in order to recover any fixed sum (i.e. rent or service charge arrears) from a former tenant (or its guarantor). A Section 17 notice (section 17 of Landlord and Tenant (Covenants) Act 1995) must be served within six months of the fixed sum becoming "due". A recipient of a Section 17 notice who makes payment in full is entitled to call for the grant of a lease which slots in between the landlord's interest and the interest of the tenant who owed the fixed sum which the recipient of the Section 17 notice has paid. The person claiming an overriding lease must make a request in writing to the landlord at the time of paying the fixed sum or within 12 months of the date of that payment. This does not apply in Scotland. Step in An agreement by which the parties to a contract agree that on the occurrence of a specified event(s), a third party (e.g. funder) may assume the benefit and burden of one of the original parties. These are found in most bank collateral warranties and the events giving rise to the right and procedure to be followed are set out in the collateral warranties. When exercising step in rights the party stepping into the contract may be obliged to pay any outstanding monies due and payable under the agreement at the time of step in. The procedure to be followed to exercise step in rights often requires the giving of notices. Surrender A voluntary agreement between a landlord and the tenant to bring a lease to an end. This is commonly documented by a deed of surrender which will set out the terms of the release (i.e. is the tenant to be released from all accrued liabilities?). In Scotland the principle of surrender is similar to that in England and Wales, but in Scotland is known as a renunciation. 9
For further information please contact: Stuart Wortley T: +44 (0) 20 7490 6675 M: +44 (0) 7712 881393 E: stuart.wortley@pinsentmasons.com Siobhan Cross T: +44 (0) 20 7490 6277 M: +44(0) 7771 808143 E: siobhan.cross@pinsentmasons.com Richard Williams T: +44 (0) 20 7490 6246 M: +44 (0) 7879 486291 E: richard.williams@pinsentmasons.com Kevin Boa T: +44 (0) 20 7490 6529 M: +44 (0) 07989 575025 E: kevin.boa@pinsentmasons.com Alicia Foo T: +44 (0) 121 260 4024 M: +44 (0) 7747 791215 E: alicia.foo@pinsentmasons.com Alistair Lomax T: +44 (0) 0121 260 4007 M: +44 (0) 7721 648454 E: alistair.lomax@pinsentmasons.com Matthew Baker T: +44 (0) 113 294 5154 M: +44 (0) 7990 630601 E: matthew.baker@pinsentmasons.com Neil Whitaker T: +44 (0) 113 294 5214 M: +44 (0) 7885 514093 E: neil.whitaker@pinsentmasons.com Jamie White T: +44 (0) 161 250 0115 M: +44 (0) 7900 823400 E: jamie.white@pinsentmasons.com Jonathan Jeffries T: +44 (0) 113 294 5281 M: +44 (0) 7767 224101 E: jonathan.jeffries@pinsentmasons.com John MacKenzie T: +44 (0) 131 225 0019 M: +44 (0) 7901 715905 E: john.mackenzie@pinsentmasons.com Hugh Bruce-Watt T: +44 (0) 20 7490 6423 M: +44 (0) 07788 916439 E: hugh.bruce-watt@pinsentmasons.com Pinsent Masons LLP 2010 This note does not constitute legal advice. Specific legal advice should be taken before acting on any of the topics covered. LONDON DUBAI BEIJING SHANGHAI HONG KONG SINGAPORE OTHER UK LOCATIONS: BIRMINGHAM BRISTOL EDINBURGH GLASGOW LEEDS MANCHESTER T 0845 300 32 32 "Pinsent Masons LLP is a limited liability partnership registered in England & Wales (registered number OC333653) and regulated by the Solicitors Regulation Authority. A list of the members of Pinsent Masons LLP is open for inspection at its registered office address which is CityPoint, One Ropemaker Street, London EC2Y 9AH, United Kingdom. Singapore location in association with MPillay. We use 'Pinsent Masons' to refer to Pinsent Masons LLP and/or affiliated entities that practise under the name 'Pinsent Masons' or a name that incorporates those words, as the context requires". For important regulatory information please visit: www.pinsentmasons.com www.pinsentmasons.com