ENF 10.6 The FSA's policy: applications for insolvency orders.

1. (1)

   The FSA can petition for an administration order or compulsory winding up order on the grounds that the company or partnership is unable (or, in the case of administration orders, is likely to become unable) to pay its debts. The FSA does not have to be a creditor to petition on these grounds.

2. (2)

   Under sections 359 (Petitions) and 367 (Winding-up Petitions) of the Act, a company or partnership is deemed to be unable to pay its debts if it is in default on an obligation to pay a sum due and payable under an agreement where the making or performance of this agreement constitutes or is part of a regulated activity which the company or partnership is carrying on.

3. (3)

   The FSA would not ordinarily petition for an administration order unless it believes that the company or partnership is, or is likely to become, insolvent. Similarly, the FSA would not ordinarily petition for a compulsory winding up order solely on the ground of inability to pay debts (as provided in the Act), unless it believes that the company or partnership is or is likely to be insolvent.

4. (4)

   While a default on a single agreement of the type mentioned in (2) is, under the Act, a presumption of an inability to pay debts, the FSA will consider the circumstances surrounding the default. In particular, the FSA will consider whether:

   1. (a)

      the default is the subject of continuing discussion between the company or partnership and the creditor, under the relevant agreement, which is likely to lead to a resolution;

   2. (b)

      the default is an isolated incident;

   3. (c)

      in other respects the company or partnership is meeting its obligations under agreements of this kind; and

   4. (d)

      the FSA has information to indicate that the company or partnership is able to pay its debts or, alternatively, that in addition to the specific default the company or partnership is in fact unable to pay its debts.

1. (1)

   Where the FSA believes that a company or partnership to which sections 359(1) and 367(1) of the Act applies (see ENF 10.5.1 G and ENF 10.5.5 G) is, or is likely to be, unable to pay its debts, the FSA will consider whether it is necessary to seek an administration order or compulsory winding up order from the court.

2. (2)

   The FSA's approach will be in two stages: the first is to consider whether it is appropriate to seek any insolvency order; the second is to consider which insolvency order will meet, or is likely to meet, the needs of consumers.

In determining whether to seek an insolvency order, the FSA will consider all relevant factors, including:

1. (1)

   Whether the company or partnership has taken or is taking steps to deal with its insolvency, including petitioning for its own administration, placing itself in voluntary winding up or proposing to enter into a company voluntary arrangement, and the effectiveness of those steps;

2. (2)

   Whether any consumer or other creditor of the company or partnership has taken steps to seek an insolvency order from the court;

3. (3)

   the effect on the company or partnership and on the creditors of the company or partnership if an insolvency order is made;

4. (4)

   Whether the use of other powers available to the FSA will achieve the same or a more advantageous result in terms of the protection of consumers, and of market confidence and the restraint and remedy of unlawful activity:

   1. (a)

      in the case of authorised persons and appointed representatives, the interests of consumers may, in certain circumstances, be met by the use of the FSA's intervention powers and by requiring restitution to consumers;

   2. (b)

      in the case of unauthorised companies and partnerships, the FSA will consider whether the interests of consumers can be achieved by seeking an injunction to restrain continuation of the carrying on of the regulated activity and an order for restitution to consumers;

   3. (c)

      when it considers whether these courses of action are appropriate, the FSA will take full account of their effects on the creditors of the body;

5. (5)

   the nature and extent of the body's assets and liabilities, and in particular whether the body holds client assets and whether its secured and preferred liabilities are likely to exceed available assets;

6. (6)

   Whether there is a significant cross border or international element to the business which the company or partnership is carrying on and the effect on foreign assets or on the continuation of the business abroad of making an insolvency order; and

7. (7)

   Whether there is a risk of creditors being preferred which may be an advantage in securing a moratorium in relation to proceedings against the body.

After the FSA has determined that it is appropriate to seek an insolvency order, and there is no moratorium in place under Schedule A1 to the 1986 Act, it will consider whether this order should be an administration order or a compulsory winding up order.

1. (1)

   As stated in ENF 10.4 the FSA's general approach to the use of the power to seek an insolvency order from the court is to consider the needs of the consumers and the FSA's regulatory objectives.

2. (2)

   The FSA will consider whether to apply for an administration order or a compulsory winding up order having regard to the purpose achieved by the insolvency procedure. In addition, however, an administration order can be made only in relation to companies and partnerships and only where the court believes that making such an order will achieve one or more of the four purposes set out in section 8 of the 1986 Act (see ENF 10.5.3 G). The FSA will apply for an administration order only where it considers this will meet or is likely to meet one or more of these purposes.

3. (3)

   In addition, the FSA will consider, where relevant, factors including:

   1. (a)

      the extent to which the financial difficulties are or are likely to be attributable to the management of the company or partnership or external factors, for example, market forces;

   2. (b)

      the extent to which it appears to the FSA that the company or partnership may, through an administrator, be able to trade its way out of its financial difficulties;

   3. (c)

      the extent to which the company or partnership can lawfully and viably continue to carry on regulated activities through an administrator;

   4. (d)

      the extent to which the sale of the business in whole or in part as a going concern is likely to be achievable;

   5. (e)

      the complexity of the business of the company or partnership;

   6. (f)

      whether recourse to one regime or another is likely to result in delays in redress to consumers or an additional cost;

   7. (g)

      whether recourse to one regime or another is likely to result in better redress to consumers;

   8. (h)

      the adequacy and reliability of the company or partnership's accounting or administrative records;

   9. (i)

      the extent to which the management of the company or partnership has co-operated with the FSA;

   10. (j)

       in the case of an unauthorised company or a partnership carrying on a regulated activity as part of a larger enterprise, the scale and importance of the unauthorised activity in relation to the whole of the company's or partnership's business;

   11. (k)

       the extent to which the management of the company or partnership is likely to cooperate in determining whether one or more of the purposes of an administration order can be met;

   12. (l)

       in the case of an unauthorised company or partnership carrying on a regulated activity as part of a larger enterprise, the extent to which the company's or partnership's survival can be anticipated without the discontinuance of the unauthorised regulated activity;

   13. (m)

       where an administrative receiver is in place, whether the debenture holder is likely to agree to an application for an administration order;

   14. (n)

       where an administrative receiver is in place, whether the FSA has reason to believe that the debenture under which the administrative receiver has been appointed is likely to be released, discharged, avoided or challenged.

1. (1)

   The FSA has power under section 367(3)(b) of the Act to petition the court for the compulsory winding up of a company or partnership, on the grounds that it is just and equitable for the body to be wound up, regardless of whether or not the body is able to pay its debts. In some instances the FSA may need to consider whether to petition on both these grounds and on grounds of insolvency.

2. (2)

   When deciding whether to petition on these grounds the FSA will consider all relevant facts including:

   1. (a)

      whether the needs of consumers and the public interest require the body to cease to operate;

   2. (b)

      the need to protect consumers' claims and client assets;

   3. (c)

      whether the needs of consumers and the public interest can be met by using the FSA's other powers;

   4. (d)

      in the case of an authorised person, where the FSA considers that the authorisation should be withdrawn or where it has been withdrawn, the extent to which there is other business that the person can carry on without authorisation;

   5. (e)

      in the case of an unauthorised body carrying on a regulated activity as part of a larger enterprise, the scale and importance of the unauthorised regulated activity and the extent to which the enterprise is likely to survive the restraint and remedying of that activity by the use of other powers available to the FSA;

   6. (f)

      whether there is reason to believe that an injunction to restrain the carrying on of an unauthorisedregulated activity would be ineffective;

   7. (g)

      whether the body appears to be or to have been involved in financial crime or appears to be or to have been used as a vehicle for financial crime.

3. (3)

   Where appropriate the FSA will also take the following factors into account:

   1. (a)

      the complexity of the body (as this may have a bearing on the effectiveness of winding up or any alternative action);

   2. (b)

      whether there is a significant cross border or international element to the business being carried on by the body and the impact on the business in other jurisdictions;

   3. (c)

      the adequacy and reliability of the body's accounting or administrative records;

   4. (d)

      the extent to which the body's management has cooperated with the FSA.

Section 365(6) of the Act (FSA's powers to participate in proceedings) makes clear that the FSA may petition for the compulsory winding up of a company even if that company is already in voluntary winding up. This power is already available to creditors and contributories of companies in voluntary winding up, although it is rarely exercised. In many instances where there is concern about the way in which a voluntary winding up is proceeding, any creditor or contributory of a company in voluntary winding up (or its liquidator) may apply to the court for it to exercise any power which it would have in a compulsory winding up. For example, the court can be asked to direct the liquidator to investigate a transaction which the company undertook before the winding up. Under section 365(2) of the Act, the FSA also has the power to make such an application.

1. (1)

   Given the powers available to creditors (or contributories), the FSA anticipates that there will only be a limited number of cases where it will exercise the right under section 365(6) to petition for the compulsory winding up of a company already in voluntary winding up. The FSA will only be able to exercise this right where one or both of the grounds on which it can seek compulsory winding up are met (see ENF 10.5.7 G).

2. (2)

   Factors which the FSA will consider when it decides whether to use this power (in addition to the factors identified in ENF 10.6.5 G and ENF 10.6.6 G in relation to the FSA's decisions to seek compulsory winding up) include:

   1. (a)

      whether the FSA's concerns can properly and effectively be met by seeking a specific direction under section 365(2) of the Act;

   2. (b)

      whether the affairs of the company require independent investigation of the kind which follows a compulsory winding up order and whether there are or are likely to be funds available for that investigation;

   3. (c)

      the composition of the creditors of the company and in particular the ratio of consumer and non-consumer creditors;

   4. (d)

      the extent to which there are creditors who are or are likely to be connected to the company or its directors and management;

   5. (e)

      the extent to which the directors and management of the company are cooperating with the liquidator in voluntary winding up;

   6. (f)

      the need to protect and distribute consumers' claims and assets;

   7. (g)

      whether a petition by the FSA for compulsory winding up is likely to have the support of the majority or a large proportion of the creditors; and

   8. (h)

      the extent of any resulting delay and additional costs.

Where the FSA is requested by a Home State regulator of an EEA firm or a Treaty firm to present a petition for the compulsory winding up of that firm, the FSA will first need to consider whether the presentation of the petition is necessary in order to comply with a Community obligation.

Where a petition has been presented for the winding up of a body, the court may appoint a provisional liquidator in the interim period pending the hearing of the petition. An appointment may be sought and made to:

1. (1)

   enable the affairs of the company or partnership to be conducted in the proper manner; or

2. (2)

   protect assets in the possession or under the control of the company or partnership (in particular where there is a risk that the assets will be dissipated); or

3. (3)

   allow the winding up process to start before the determination of the petition where the public interest requires it.

In cases where it decides to petition for the compulsory winding up of a body under section 367 of the Act, the FSA will also consider whether it should seek the appointment of a provisional liquidator. The FSA will have regard, in particular, to the extent to which there may be a need to protect consumers' claims and consumers' funds. Where the FSA decides to petition for the compulsory winding up of a company or partnership on the just and equitable ground, and where the company or partnership is solvent but may become insolvent, the FSA will also consider whether the appointment of a provisional liquidator would serve to maintain the solvency of the company or partnership.

1. (1)

   The FSA recognises that the bankruptcy of an individual or the sequestration of an individual's estate are significant measures which may have significant personal and professional implications for the individual involved. In considering whether to present a petition the FSA's principal consideration will be the protection of consumers and its regulatory obligations.

2. (2)

   The FSA is also mindful that whilst the winding up of an unauthorised company or partnership should bring an end to any unlawful activity, this is not necessarily the effect of bankruptcy or sequestration. The FSA may, in certain cases, consider the use of powers to petition for bankruptcy or sequestration in conjunction with the use of other powers to seek injunctions and other relief from the court. In particular, where the individual controls assets belonging to consumers and holds, or appears to hold, those assets on trust for consumers, those assets will not vest in the insolvency practitioner appointed in the bankruptcy or sequestration. The FSA will in those circumstances consider whether separate action is necessary to protect the assets and interests of consumers.

1. (1)

   If an individual appears to be unable to pay a regulated activity debt, or to have no reasonable prospect of doing so, then section 372 of the Act permits the FSA to petition for the individual's bankruptcy, or in Scotland, for the sequestration of the individual's estate. The FSA will petition for bankruptcy or sequestration only if it believes that the individual is, in fact, insolvent.

2. (2)

   In determining this, as a general rule, the FSA will serve a demand requiring the individual to establish, to the FSA's satisfaction that there is a reasonable prospect that he will be able to pay the regulated activity debt.

3. (3)

   The FSA will consider the response of each individual to that demand on its own facts and in the light of information, if any, available to the FSA. Exceptionally, the FSA may not first proceed to serve a demand if:

   1. (a)

      the individual is already indefault of a regulated activity debt which has fallen due and payable; and

   2. (b)

      the FSA is satisfied, either because the individual has confirmed it or on the information already available to the FSA, that the individual is insolvent and has no reasonable prospect of paying another regulated activity debt when it falls due.

If the FSA believes that the individual is insolvent, the factors it will consider when it decides whether to seek a bankruptcy order or sequestration award include:

1. (1)

   whether others have taken steps to deal with the individual's insolvency, including a proposal by the individual of a voluntary arrangement, a petition by the individual for his own bankruptcy or sequestration, or a petition by a third party for the individual's bankruptcy or the sequestration of the individual's estate;

2. (2)

   whether the FSA can deal with the individual using other powers available to it under the Act, without the need to seek a bankruptcy order or sequestration award;

3. (3)

   the extent of the individual's insolvency or apparent insolvency;

4. (4)

   the number of consumers affected and the extent of their claims against the individual;

5. (5)

   whether the individual has control over assets belonging to consumers;

6. (6)

   the individual's conduct in his dealings with the FSA, including the extent of his cooperation with the FSA;

7. (7)

   whether the individual appears to be, or to have been, involved in financial crime;

8. (8)

   the adequacy of the individual's accounts and administration records;

9. (9)

   in the case of an unauthorised individual who is carrying on or who has carried on a regulated activity, the nature, scale and importance of that activity and the individual's conduct in carrying on that activity;

10. (10)

    whether there would be an advantage in securing a moratorium in respect of proceedings against the individual; and

11. (11)

    whether there are any special personal or professional implications for that individual if a bankruptcy order or sequestration award is made.