1. Introduction to UK Corporate Insolvency Lloyds TSB Bank plc Jonathan Lawrence, Celia Hayward and Duncan Batty K&L Gates 110 Cannon Street, London EC4N 6AR

2. What is insolvency?  When a corporate entity “is unable to pay its debts” (Section 123 Insolvency Act 1986)  Tests  Failure to pay a statutory demand  Execution on a judgement is unsatisfied  Unable to pay its debts as they fall due (“cash flow” test)  Value of assets less than liabilities (“balance sheet” test)  Threshold amount: £750

3. Relevance to Lenders?  Likelihood of repayment of loans if borrower insolvent?  Loan agreement contains safeguards: chiefly through events of default and acceleration  LMA clause 28.6: Event of Default if relevant entity is unable to pays its debts as they fall due or value of its assets is less than its liabilities  LMA clause 28.7: Event of Default if liquidator, receiver, administrator, administrative receiver, compulsory manager or similar officer appointed in respect of a relevant entity  Consequence? LMA clause 28.20: following the occurrence of an Event of Default the lender/agent can declare all or any part of the amounts outstanding under the facility to be immediately due and payable  Question: how does acceleration help the lender?

4. Pre-insolvency: Protection for the Lender  Most importantly through security  Fixed charge  Floating charge  Security Trustee  Effect? Enforcement and realisation  100% flawless?  No…

5. Deficiencies with taking security  Floating charges and the “prescribed part”  Statutory order of priority of proceeds  Moratorium (with certain insolvency proceedings)  Deficiencies in realisation

6. Insolvency Procedures  Liquidation  Administration  Administrative receivership and fixed asset receivers (e.g. LPA receiver)  Compromise arrangements

7. Background to the Enterprise Act 2002  Came into force on 15 September 2003  Promotion of “rescue culture”  Abolition of Crown preference  Creation of the prescribed part

8. Receiverships, Administrations and Company Voluntary Arrangements in England and Wales registered at Companies House (figures from the Insolvency Service website) YearReceivership Administrator In Administration Company Appointments Appointments (Enterprise ActVoluntary 2002)Arrangements 1997 1,837 196:629 1998 1,713 338:470 1999 1,618 440:475 2000 1,595 438:557 2001 1,914 698:597 2002 1,541 643:651 2003 1,261 497 247726 2004 864 11,601597 2005 590 42,257604 2006 588 03,560534 2007 477 22,327399

9. Insolvency Procedures: Administration  Active businesses, significant assets, potential  Statutory “purposes” brought in by Enterprise Act 2002  Rescue company as a going concern  Achieve a better result than in liquidation  Realise property for secured (or preferential) creditor  Moratorium  Appointment is by notice (company, directors or QFC, who has overriding powers) or by application to court (company, directors, all creditors)  First ranking QFC can appoint its own choice of administrator  Administrator owes duties to all creditors  Challenges to administrator

10. Insolvency Procedures: Receivership  The appointment of a person to administer (i.e. sell) specific property charged to a creditor  Administrative Receivership, now relatively rare – Enterprise Act 2002 limits this to security created before 15 September 2003 and certain other exceptions  Realise certain assets of borrower charged to appointor to repay indebtedness to appointor  No moratorium  Appointment by a qualifying floating charge holder with a floating charge over all, or substantially all, of the assets of the debtor company  Administrative receiver owes duties solely to appointor  Blocks appointment of administrator  LPA Receivership and Fixed Charge Receivership

11. Administration vs Administrative Receivership  Moratorium  Duty to act in the interests of all creditors  Deemed agent of the company  Administrators must provide proposals and information to all creditors  Lasts for 12 months unless extended  Administrator has wider statutory powers  e.g. to dismiss/appoint directors  call meetings  No Moratorium  Main duty is to appointor (i.e. to chargeholder)  Also deemed to be the agent of the company

12. Insolvency Procedures: Liquidation  Terminal procedure  Appointment? Shareholder resolution (voluntary liquidation) or court order (compulsory liquidation)  Realisation, distribution, dissolution  Order of priorities  Delay in enforcement

13. Insolvency Procedures: Compromise Arrangements  Creditors agree procedure for borrower’s survival  Two main types:  Scheme of arrangement  Requires application to court for an order that a meeting of creditors is summoned  Need ¾ by value and simple majority of creditors to agree to the scheme  Binding on all creditors once approved by the court  Company voluntary arrangement (CVA)  75% of creditors by value and simple majority of members to agree to the arrangement  Not binding on secured creditors unless they have agreed to the arrangement  Supervised by an insolvency practitioner  Often used as part of an administration strategy to take advantage of the moratorium provisions  No automatic moratorium

14. Case Study 1: SPV Borrower  Lend £50m in 2005 to Armitage Shanks Limited, a clean SPV. ASL used the money to purchase a commercial property with a sole tenant. Property very specifically fitted out due to the business of the tenant. Valuer gave the property a Day One valuation of £80m and most recent valuation suggests LTV not breached  Security package: (i) first legal mortgage over the property; (ii) first fixed charge over other fixed assets of ASL; (iii) floating charge over all other assets of ASL; (iv) charge over shares in ASL given by ASL’s parent  Disaster! Tenant unexpectedly hits financial difficulties and ASL has to compromise on rent collection. ASL misses its next interest payment under the loan. No sign of recovery shown

15. Case Study 1: SPV Borrower - Questions  What would you do first?  What insolvency procedures are available?  Which procedure would you choose and why?

16. Case Study 2: Property Company Borrower  Same as Case Study 1 except:  ASL is an operating company owning a portfolio of real estate funded by a variety of other lenders, each of which has a first charge over the property they funded (your floating charge is still first ranking however)  LTV has been breached  Subject property is a general office building with no specialist features  Remaining properties in portfolio are performing well  Triumphant intercreditor negotiation (by K&L Gates) means there are no standstill provisions to worry about

17. Case Study 2: Property Company Borrower - Questions  Which insolvency procedure would you choose and why?  Would your answer differ is the security package had been granted in 2002 rather than 2007?

18. LMA Events of Default: Insolvency 28.6 Insolvency  A member of the Group is unable or admits its inability to pay its debts as they fall due [or is deemed to or declared to be unable to pay its debts under applicable law], suspends or threatens to suspend making payments on any of its debts or, by reason of actual or anticipated financial difficulties, commences negotiations with one or more of its creditors with a view to rescheduling any of its indebtedness.  The value of the assets of any member of the Group is less than its liabilities (taking into account actual and contingent liabilities).  A moratorium is declared in respect of any indebtedness of any member of the Group. If a moratorium occurs, the ending of the moratorium will not remedy an Event of Default caused by that moratorium.

19. LMA Events of Default: Insolvency Proceedings 28.7 Insolvency proceedings  Any corporate action, legal proceedings or other procedure or step is taken in relation to:  the suspension of payments, a moratorium of any indebtedness, winding-up, dissolution, administration or reorganisation (by way of voluntary arrangement, scheme of arrangement or otherwise) of any member of the Group;  a composition, compromise, assignment or arrangement with any creditor of any member of the Group;  the appointment of a liquidator, receiver, administrator, administrative receiver, compulsory manager or other similar officer in respect of any member of the Group or any of its assets; or  enforcement of any Security over any assets of any member of the Group, or any analogous procedure or step is taken in any jurisdiction.  Paragraph (a) shall not apply to:  any winding up petition which is frivolous or vexatious and is discharged, stayed or dismissed within [14] days of commencement or, if earlier, the date on which it is advertised; or  any step or procedure contemplated by paragraph (b) of the definition of Permitted Indebtedness.

20. LMA Events of Default: Creditor’s Process 28.8 Creditor’s Process Any expropriation, attachment, sequestration, distress or execution [or any analogous process in any jurisdiction] affects any asset or assets of [member of the Group]/[Obligor]/[Material Company] [having an aggregate value of [ ]] [and is not discharged within [ ] days.

21. LMA Events of Default: Acceleration 28.20 Acceleration On and at any time after the occurrence of an Event of Default [which is continuing] the Agent may, and shall if so directed by the Majority Lenders, by notice to the Parent…declare all or part of the amounts (or cash cover in relation to those amounts) outstanding under the Ancillary Facilities to be immediately due and payable, at which time they shall become immediately due and payable.

22. Attendees Duncan Batty T +44 (0)20 7360 8262 duncan.batty@klgates.com Jonathan Lawrence T +44 (0)20 7360 8242 jonathan.lawrence@klgates.com Celia Hayward T +44 (0)20 7360 8260 celia.hayward@klgates.com