Simple Guide to Corporate Insolvency

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1 Simple Guide to Corporate Insolvency Stephen Grant, Keith Stevens & Vee Bharakda 17 February 2013

2 Background Wilkins Kennedy LLP is a top 20 accountancy firm with offices throughout the South East Amersham, Hertford, Ashford, Reading, Guildford, Egham, London Bridge, Southend, Winchester, Romsey, Orpington as well as an office in the Falkland Islands We offer a variety of services including tax and VAT planning, corporate finance, business recovery and insolvency, human resources, forensic accounting, property, charity and not for profit, and international tax

3 Insolvency appointments Personal appointment as Insolvency Practitioner (IP) IP known as Office Holder IPs are regulated All stakeholders have the right to complain!

4 Ethical considerations for IP Avoid conflicts of interest Perception of conflict by others Maintain independence Exercise objectivity

5 Corporate insolvency There are five categories of insolvency procedure for companies. Company Voluntary Arrangement (CVA) Administration Administrative Receivership (but very rarely happens pre 2003 debentures superseded by Enterprise Act Creditors Voluntary Liquidation (CVL) Compulsory Liquidation (winding up by the court) Other Procedures Fixed Charge Receivership Scheme of Arrangement Members Voluntary Liquidation (MVL)

6 What is Insolvency? Insolvency is legally defined as follows: A company is insolvent if it either does not have enough assets to cover its debts (ie value of assets is less than amount of liabilities), or if it is unable to pay its debts as they fall due. Once a company has become insolvent, several courses of action are open:- administration administrative receivership company voluntary arrangement liquidation Research shows that the most common reasons for corporate insolvency are: Loss of market: shrinking or changing marketplace, margins have been eroded, overtaken technically Management failure to acquire adequate skills, either through training or buying them in, over-optimism in planning, imprudent accounting, lack of management information. Fraud.

7 What happens in an insolvency? The objectives are to maximise returns to creditors. The process can be initiated by one of several parties:- The directors and/or shareholders. Creditors. A debenture holder if a bank, or other creditor, holds a charge or mortgage over the assets of a company, it may appoint an administrator or an administrative receiver. The Secretary of State for Business Innovation and skills and Industry (very rare).

8 What happens in an insolvency? Once the assets of the company are realised, they are distributed in a strict order of priority: Any one holding a fixed charge security over a company s assets is paid first, after the costs of realisation. The preferential creditors, which consist mainly of employees arrears of wages and holiday pay to specified limits. Floating charge securities (except for a proportion which may need to be set aside for unsecured creditors). Unsecured creditors (eg trade creditors) to the extent that they are not discharged as above. In insolvency cases this may result in a percentage return by way of dividend or possibly no return at all for this class of creditor, depending on the realisations and classes of creditor making a claim in the proceedings. Last in the queue are the shareholders.

9 Company Voluntary Arrangement Purpose Process Can the secured lender exercise control? Who is appointed? Is the company protected from legal actions? Rescue of the company via a contract to compromise and settle liabilities Proposals issued and voted on by creditors. Monitored by a Supervisor (an IP) Bank is usually in a strong position to influence the process Nominee, then a Supervisor (IP) No, unless a moratorium is obtained for a small company

10 Company Voluntary Arrangement contd/.. Do directors retain any control? To whom does the IP own their duty of care? Can the company trade? Report on conduct and investigations? Tax leakage? Yes. They continue to run the company Primarily the creditors but also the company Yes No Tax paid in normal course of events

11 Administration Purpose Process Can the secured lender exercise control? Who is appointed? Is the company protected from legal actions? Rescue; a better result than liquidation; distributing money to secured creditors A simple form filling and court filing process Yes. The secured lender will normally sanction the choice of the Administrator. Administrator (an officer of the Court and IP) Yes

12 Administration contd./ Do directors retain any control? To whom does the IP own their duty of care? Can the company trade? Report on conduct and investigations? Tax leakage? No. They are stripped of their power, unless the Administrator (or Court) sanctions their actions. To creditors as a whole, NOT just the secured lender. Yes Yes Post appointment capital gains and tax on revenue payable from floating charge recoveries. This can reduce the secured lender s recoveries.

13 Creditors Voluntary Liquidation (CVL) Purpose Process Can the secured lender exercise control? Who is appointed? Is the company protected from legal actions? To convert assets to cash and pay creditors in order of priority. Company burial. Resolutions at meetings of shareholders and creditors (voluntary). In most cases, can step in and appoint an Administrator instead. A Liquidator (an IP) No creditors can still issue proceedings but it would not prove commercially viable.

14 Creditors Voluntary Liquidation (CVL) contd./ Do directors retain any control? To whom does the IP own their duty of care? Can the company trade? Report on conduct and investigations? Tax leakage? No, unless the Liquidator sanction their actions To creditors as a whole, NOT just the secured lender. In theory, but very rare. Yes Post appointment capital gains and tax on revenue payable from asset recoveries.

15 Compulsory Liquidation (winding up by Court) Purpose Process Can the secured lender exercise control? Who is appointed? Is the company protected from legal actions? To convert assets to cash and pay creditors in order of priority. Company burial. Court action by creditor/shareholder/secretary of state in public interest cases In most cases, can step in and appoint an Administrator instead. A Liquidator (an IP)/Official Receiver No unless Leave of Court

16 Compulsory Liquidation (winding up by Court) contd./ Do directors retain any control? To whom does the IP own their duty of care? Can the company trade? Report on conduct and investigations? Tax leakage? No To creditors as a whole, NOT just the secured lender. In theory, but very rare. Yes Post appointment capital gains and tax on revenue payable from asset recoveries.

17 Fixed Charge Receivership Purpose Process Can the secured lender exercise control? Who is appointed? Is the company protected from legal actions? To sell fixed charge property for the secured lender s benefit. A simple form filling and Companies House filing process. Yes. This process is purely for the benefit of a secured lender. A Receiver (not necessarily an IP, normally a surveyor) No

18 Fixed Charge Receivership contd./ Do directors retain any control? To whom does the IP own their duty of care? Can the company trade? Report on conduct and investigations? Tax leakage? Main assets sold so nothing left to control. The fixed charge holder who appoints them. Yes, but the main assets are likely to be sold. None Capital gains tax not payable from realisations.

19 Members Voluntary Liquidation (MVL) Purpose Process Can the secured lender exercise control? Who is appointed? Is the company protected from legal actions? To distribute surplus funds and a return of capital to shareholders in order of priority. Statutory declaration of solvency by Directors. No but can sanction a choice of Liquidator A Liquidator (an IP) Yes creditors can still issue proceedings but it would not be commercially viable.

20 Members Voluntary Liquidation (MVL) contd./ Do directors retain any control? To whom does the IP own their duty of care? Can the company trade? Report on conduct and investigations? Tax leakage? No. Unless Liquidator sanction their action. Shareholders In theory yes, but very rare No Post appointment capital gains and tax on revenue payable from asset recoveries.

21 Contact Details Stephen Grant on or Keith Stevens on or Vee Bharakda on or Wilkins Kennedy LLP Anglo House Bell Lane Office Village Bell Lane, Amersham Bucks, HP6 6FA

22 Disclaimer & Copyright The views expressed in this material do not necessarily represent the official views of the course organiser, Wilkins Kennedy LLP. No responsibility for loss occasioned to any person's action or refraining from action as a result of reliance upon any information in the material can be accepted by the course organiser, speakers, other contributors, or Wilkins Kennedy LLP. Legislation, case law, tax practice and accounting and auditing standards are complicated and these course notes should not be regarded as offering a complete explanation of every topic covered. These papers are for the personal use of those attending the seminar. Copyright is reserved to Wilkins Kennedy LLP and this material may not be circulated, reproduced or published in whole or in part without the written consent of Wilkins Kennedy LLP.

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