Insolvency FAQs

insolvency FAQs

We have broad experience advising companies in financial difficulties, their officers and those dealing with them. We can advise on potential liabilities for directors, restructuring proposals and how to protect your interests as a creditor of an insolvent company. We also frequently act for those buying businesses from insolvency practitioners.

Frequently Asked Questions

What is Insolvency?

What are the options available to a company in financial difficulty?

What is a company voluntary arrangement?

What is administration?

What is receivership?

What is Liquidation?

The traditional view was that a company was that a company was solvent if it could pay it’s debts as they become due, no matter what the state of it’s balance sheet. However, even if a company can pay its debts as they fall due, it may nevertheless be regarded as insolvent if, according to it’s balance sheet, it’s liabilities, including contingent liabilities, exceed it’s assets.

What are the options available to a company in financial difficulty?

If a company’s directors believe it is, or may become, insolvent they should seek professional advice as soon as possible. Directors who allow a company to trade in these circumstances may become personally liable if the company fails. Ultimately, the advice may be that the company can continue to trade itself out of insolvency or it may have to enter a formal insolvency procedure.

Those procedures include company voluntary arrangements and the appointment of an administrator which may result in the company (or at least it’s business) continuing as a going concern. However, there may in the end be no alternative but to liquidate or wind up the company. The choice will depend on what is best for the creditors and for the company as a whole.

What is a company voluntary arrangement (CVA)?

A CVA is a procedure which enables the company to put a proposal to it’s creditors under which creditors agree to accept partial settlement of the debts due to to them. The procedure is extremely flexible and the form which the voluntary arrangement takes will depend on the terms of the proposal agreed by the creditors.

The proposed arrangement requires the approval of at least 75% in value of the creditors, and once approved is legally binding on the company and all it’s creditors, whether or not they voted in favour of it. There is limited involvement by the court, and the scheme is under the control of an insolvency practitioner acting as a supervisor.

Although creditors will not recover their debts in full, a CVA may enable them to recover more than if a more formal, and costly, procedure was entered into.

However, one disadvantage for the company is that (except in the case of some smaller companies), until the CVA is agreed, there is nothing to stop an individual creditor from pursuing his debt and seeking to wind up the company. This is one reason why in many cases Administration is a preferred route although sometimes is is combined with a CVA.

What is Administration?

Administration is a procedure which places a company under the control of an insolvency practitioner either at the instigation of the company or its creditors. An administrator may be appointed by an order of the court or by direct appointment by the company, its directors or a creditor who holds comprehensive security of a type which qualifies him or them to make such an appointment. The administrator has broad powers to carry on the company’s business and realise its assets and, while he is in office, displaces the directors’ powers to manage the business.

Two of the aims of Administration are to rescue the company as a going concern, or achieve a better result for the creditors as a whole than going into liquidation.

An advantage for a company is that, while it is in Administration, creditors are prevented from taking any actions against it except with the permission of the court. This can allow a breathing space in which to restructure the business on a sustainable basis.

When the Administration ends the company may be returned to the control of its directors and management, but many Administrations end an exit route into a CVA or Liquidation of the company.

What is Receivership?

Receivership is an enforcement remedy available to a creditor holding certain types of security. A Receiver is normally appointed by a bank or other lender when a company breaches the terms of its borrowing. A Receiver may be appointed in respect of certain assets (for example, land and buildings) over which fixed charges are held by the creditor. Also, a lender which held security that included a floating charge over all (or substantially all) of the assets of a company, could formerly appoint an Administrative Receiver over the whole of those assets and the company’s business.

The Receiver will have broad powers to manage and to dispose of the assets charged but only an Administrative Receiver can manage and dispose of the business as a whole. Often an Administrative Receiver will, like an Administrator, continue the run the business for a time to enable it to be sold as a going concern.

However, the Receiver’s principal function is to recover the monies owed to the creditor who appointed him, rather than to save the business or obtain a return for all creditors. It is a method for a secured creditor to realise its debts, rather than a rescue mechanism for the company. Because of this, and to encourage the use of Administration, the government has (with certain limited exceptions) removed creditors’ ability to appoint an Administrative Receiver under a charge created after 15 September 2003. Charges that would formerly allow a lender to appoint an Administrative Receiver will now entitle it only to appoint an Administrator (who will owe duties to the creditors as a whole rather than just the person appointing him). It does, though, remain possible to appoint a Receiver in relation to property subject to fixed charges.

What is Liquidation?

Liquidation or winding up is the formal termination of a company’s affairs entailing the realisation of its assets and the distribution of the proceeds in a prescribed order of priority. It may be ordered by a court or commenced voluntarily by a company’s shareholders. In relatively rare circumstances, perhaps because a company’s purpose has run its course or because of a dispute between the shareholders, a solvent company will go into Members Voluntary Liquidation, controlled by its shareholders. However, more often there will be a voluntary liquidation of an insolvent company (often following on from an Administration or Receivership).

The process will be controlled by the creditors, seeking to realise as much as possible towards their unpaid debts. With few exceptions, liquidation is the end of the road for a company and ultimately, after the company has been fully wound up, it will be removed from the Register of Companies. This is the most common outcome for an insolvent company.

It’s hard to think straight when you’ve got a serious debt problem. You’re stressed, you can’t sleep, people constantly hound you for money and the temptation is to bury your head in the sand. What you need is honest, independent and cost-free advice on the best way of becoming debt-free.

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