Corporate and Personal Insolvency

Companies facing insolvency

What is insolvency?

Insolvency is a condition of financial difficulty, and can apply to a company or an individual. It is an umbrella term under which fall many different procedures as set out by the Insolvency Act 1986. Company insolvency procedures include liquidation, voluntary arrangement and administration. Which of these terms applies depends on what type of company you have and your individual situation.

Many people confuse the term insolvency with bankruptcy, but if your company is facing financial problems, it’s important to understand the difference between them so you can make informed decisions.

Company Liquidation

The shareholders of a company can choose to put it into liquidation, even if it is solvent, but liquidation can also be forced by the courts.

There are three types of liquidation:

• Members' voluntary liquidation (or members' voluntary winding up):the shareholders decide to put the company into liquidation. There are sufficient assets to pay all the company’s debts in full within one year, i.e. the company is solvent.
  
  
• Creditors' voluntary liquidation (or creditors' voluntary winding up): the company’s shareholders decide to put it into liquidation. There are not enough assets to pay all the company’s creditors, i.e. the company is insolvent.
  
  
• Compulsory liquidation (or compulsory winding up): the court makes a winding-up order for the company to be wound up, following a petition submitted by an appropriate person.

An insolvency practitioner, such as a Partner at Harris Lipman, administers the liquidation of a company or partnership by collecting and selling its assets to pay off creditors.

Insolvency practitioners are usually an accountant or solicitor. They are authorised either by the Secretary of State or by a recognised professional bodies, including the Association of Chartered Certified Accountants (ACCA) and the Institute of Chartered Accountants in England and Wales (ICAEW).

For more information on how Harris Lipman can help, please email InfoInsolvency@harris-lipman.co.uk or call (020) 8446 9000.

Administration and Receivership

Administrators

A company in difficulties, but which has some hope of recovery, may be put into the charge of a legally-appointed administrator, such as an insolvency practitioner like Harris Lipman.

The administrator, also known as an administrative receiver, takes compulsory control of the business to rescue or it or dissolve it fairly. Administrators can be appointed by:

• a company that is unable, or likely to become unable, to pay its debts or by its directors
• the courts, following an application by a creditor, directors or partners
• the holder of a qualifying floating charge over the company’s assets.

Once an administrator is appointed, the company is protected from action being taken by creditors. The administrator’s first priority is to stabilise the company’s financial position. Once this is achieved, the administrator will develop an action plan for its future, working, if possible, with the company’s managers.

Administration

Once a company is in administration, it cannot be wound up without the court's permission.
The process buys time for a business, perhaps allowing it to get out of trouble and trading again or for the administrator to rescue the company as a going concern.

If this is not possible, the administrator will to try to achieve a better result for creditors than if the company was wound up.

However, if neither of these options proves possible, the administrator will sell the company's property or the business itself so that at least a partial payment can be made to one or more secured or preferential creditors, such as employees or the bank.

The appointment of the administrator expires after one year, although this can be extended provided the creditors or the court agrees. Administration can also apply to partnerships.

Administrative receivership

When a company borrows money, the lender usually has some security over its assets to ensure that repayment is made.

If the company does not keep to the terms of the loan, or suffers financial difficulties, the lender may be entitled to appoint an administrative receiver. An administrative receiver can only be appointed in relation to a change created before September 2003.

The administrative receiver is an insolvency practitioner, such asPartner at Harris Lipman, who controls all or a substantial part of the company's property and has wide powers over the business.

The administrative receiver’s principal aim is to get back the money the company owes to the secured creditor. The administrative receiver may sell assets individually or the company as a going concern to pay the secured creditor and the costs of the receivership.

Receivership

A company in administrative receivership is often said to be "in receivership".

For more information on how Harris Lipman can help, please email InfoInsolvency@harris-lipman.co.uk or call (020) 8446 9000.

Corporate voluntary arrangements (CVAs)

Under a CVA, a company makes a court-approved agreement with its creditors that allows it to continue trading while also agreeing terms with the creditors to settle its debts. A CVA can be proposed by

• the administrator, if there is an administration order;
• the liquidator, if the company is being wound up; or
• the directors, in all other circumstances.

The court has limited involvement and the CVA scheme is controlled by a supervisor, who must be an insolvency practitioner, such as a Partner at Harris Lipman. However, the directors of the company have day to day control over their business.

A CVA usually lasts between three to five years. It can specify whether the creditors will be fully paid over that time or whether they will receive part payment, with the rest of the debts written off.

CVAs are particularly useful when a company that is basically profitable suffers a one-off difficulty, such as a large bad debt.

Certain companies can obtain a moratorium to prevent creditors taking enforcement action while a CVA proposals are considered if they satisfy two of the following criteria:

• Annual turnover not more than £5.6m.
• Balance sheet total not more than £2.8m.
• Number of employees not more than 50

For more information on how Harris Lipman can help, please email InfoInsolvency@harris-lipman.co.uk or call (020) 8446 9000.

Laste Updated 17/07/2008

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