When a company faces financial problems, the prospect of administration or insolvency can cause considerable worry. This guide to insolvency is designed to help explain the options open to distressed companies.
Administration is available to companies that are, or are likely to become, insolvent. It is a way of trying to avoid or postpone insolvency by putting the company under the control of an insolvency practitioner and the protection of the court.
The administrator tries to rescue the company as a going concern, and so give creditors a better result than if it were immediately liquidated.
If a rescue is unachievable, the administrator will realise property to make a distribution to secured or preferential creditors.
An administrator may be appointed.
- By court order – on application by the company or its creditors, or by the liquidator (if already in liquidation)
- Without a court order – by direct appointment of the company, its directors or a creditor with security that qualifies them to do so
When a company is in administration, creditors cannot take any actions against it, except with the court's permission.
An administration must conclude within one year, however the creditors or court may extend this if necessary. The administration may also end if the administrator thinks it has achieved, or cannot achieve, its purpose.
Company Voluntary Arrangement (CVA)
A Company Voluntary Arrangement is a way of trying to avoid liquidation. An insolvency practitioner, who acts on behalf of creditors, proposes an arrangement to centralise and repay all debts. They set up a trust account and as long as company makes the required payments, no creditors involved in the CVA can take legal action to force the company into liquidation
CVAs may involve delayed or reduced debt payments, capital restructuring, or an orderly disposal of assets. It will require approval of at least 75% (by value) of the creditors. Once approved, it is legally binding on the company and all its creditors, whether or not they voted for it.
If a Company Voluntary Arrangement cannot be arranged, then a company can go into Administration in order to buy some time and prevent creditors from taking legal action. An IP is appointed as the Administrator, who takes control of assets and business operations in order to repay as much debt as possible. When a company goes into administration, all legal action against it, such as receivership and winding-up orders, are stayed for a period of about eight weeks while the Administrator prepares a proposal for creditors.
A pre-pack administration, also known as a pre-packaged sale, is an arrangement whereby, an insolvency practitioner arranges sells the company to a third party so that it continue operating under new ownership without interruption. Pre-packs are very controversial, so should only be considered if liquidation is highly likely and all other options have been exhausted.
Receivership is a process where a creditor appoints a receiver over an insolvent company's assets or properties. The receiver acts in the interests of the creditor.
Fixed Charge Receivership is where a secured creditor appoints a receiver over the assets specified in a secured loan agreement. The receiver’s powers extend only to what is detailed in the charge document. So they can control all assets within the charge, but not the underlying business.
A fixed charge receiver is also commonly referred to as a Law of Property Act receiver. This only occurs when the receiver is appointed over a specific property under the Law of Property Act 1925. Again, the receiver’s powers extend only to those in the Act or as amended in the fixed charge document.
The other form of receivership is Administrative Receivership. These are uncommon because they only apply to securities, usually debentures, granted before 15 September 2003.
Liquidation is the process of selling a company’s assets in order to pay its debts. If there are enough assets to pay off all its debts, a company can go into a form of solvent liquidation known as a Members’ Voluntary Liquidation.
If there are insufficient assets to cover debts, the company must go into insolvent liquidation. This can be done in agreement with the creditors through a Creditor’s Voluntary Liquidation, or it can through Compulsory Liquidation where the creditors petition the Court to force the company into liquidation.
Whichever route is taken, the purpose is to liquidate the company assets and settle its debts. When liquidating a company, a licensed insolvency practitioner takes responsibility for the liquidation and is legally bound to act in the interests of the creditors.
Creditors Voluntary Liquidation (insolvent liquidation)
CVL is a form of insolvent liquidation where the company's directors choose to bring the business to an end by appointing an insolvency practitioner to liquidate all assets. Because the company is insolvent, the proceeds are distributed to creditors and not shareholders.
It is a voluntary process, so with a CVL an IP is appointed and a plan developed to liquidate assets and pay creditors. If the creditors agree with the proposal, a liquidator is appointed and the company's assets are liquidated.
Unlike voluntary liquidation, compulsory liquidation means that an insolvent company is forced to liquidate its assets under the direction of a liquidator who is appointed by the Court or the creditors.
Normally, one or more unsecured creditors petitions the Court to force the company into liquidation so that its assets can be sold in order to repay outstanding debts. The court also appoints an Official Receiver, who begins valuing, marketing, and selling the company’s assets.
Solvent liquidation Members’ Voluntary Liquidation
Nor all company liquidations are the result of financial problems. Sometimes, the shareholders have no further use for a business, and want to realise its assets.
A solvent voluntary liquidation is often called an MVL. The shareholders adopt a voluntary winding up resolution and appoint a liquidator to realise the assets of the business and distribute the proceeds to company members. A company is solvent when it is able to meet its financial obligations (ie value of its assets exceeds the sum of all its debts and liabilities).
The liquidation procedure enables the formal winding up of a company’s affairs. All assets are realised, or distributed, in a prescribed order of priority. The procedure is appropriate when the directors or members consider a company has no further purpose.
A voluntary liquidation begins with a resolution of the shareholders. All directors' powers then cease, other than those that the shareholders or liquidator sanction.
To enter into an MVL the shareholders must make a Declaration of Solvency, which states that they can repay all debts within 12 months.
This declaration differentiates an MVL from insolvent liquidation. It includes an up-to-date statement of the company’s assets and liabilities, and it must be made before the members pass the resolutions to wind up.