Insolvency and Liquidation

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1 Insolvency and Liquidation There are many different ways of dealing with company debt. In most cases, an authorised insolvency practitioner will be appointed to manage a company s affairs once insolvency proceedings start. If you think your company is in danger of becoming insolvent you should take independent professional advice at the earliest possible stage. A company is insolvent in two situations: Receivership Cash flow insolvency the company is unable to pay its debts as they fall due. As an example, a creditor who is owed more than 750 may present a written demand in the prescribed form (known as a statutory demand) to the company. If the company fails to pay, secure or agree a settlement of the debt to the creditor s reasonable satisfaction, it will be considered unable to pay its debts. Balance sheet insolvency the value of the company s assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities. There are a number of different forms of receivership, but the most common is the process by which an unpaid creditor of the company, often a bank, can appoint an authorised insolvency practitioner to sell (or otherwise realise) assets which were given as security for a loan (charged) and apply the proceeds to the debt owed to the lender. Such charges are registered at Companies House, so that any potential creditor realises they exist, and remain in force until the loan is repaid. The charge can be a fixed charge, on a specific fixed asset, such as land and buildings or a piece of machinery and the borrower would need the lender s permission to dispose of any assets covered by the charge. Alternatively it may be a floating charge over all the company's assets, such as stock in trade, plant and machinery, vehicles, etc. Floating charges are useful for many companies, allowing them to borrow even though they have no specific assets, such as freehold premises, which they can use as security. The company can continue to use the assets in the ordinary course of business and can replace assets without needing permission from the lender. If the terms of the charge are breached, or if the borrower cannot repay the loan, the lender may appoint a receiver to realise the assets and repay the loan. Whilst this realisation is being carried out the company is said to be in receivership. This may well be followed by a liquidation.

2 There are many other different kinds of receiver and their powers vary according to the terms of their appointment. Corporate voluntary arrangements (CVAs) A CVA is a procedure whereby a company makes a court-approved arrangement with its creditors for the settlement of its debts. The arrangement must be supervised by a qualified insolvency practitioner (a nominee). The court, on request, may decide that the company is eligible for a moratorium on insolvency and other legal proceedings, which will normally last for 28 days. During this period the directors remain in control of the company with the support of a nominee. The moratorium prevents creditors from taking enforcement action without court permission, whilst the details of the CVA are worked out. A CVA may be proposed by the directors, an administrator or a liquidator (if either exist). Where the directors have made the proposal, their nominee must report to the court with an opinion as to whether meetings of the company s shareholders and its creditors should be called. If such meetings are called either may approve the arrangement (with or without modifications). It then becomes binding on all creditors who had notice of the meeting and were entitled to vote. At this stage the nominee (or appointed replacement) becomes the supervisor of the CVA. There are standard reporting requirements, including progress reports and notification of final completion, termination, suspension or revocation of the CVA. Administration This is a mechanism whereby a company can be rescued, reorganised or its assets realised, whilst under the protection of a statutory moratorium. The administrator, who must be a qualified insolvency practitioner, will have the status of an officer of the court, whether or not actually appointed by the court, and his objective is: rescue the company as a going concern; achieve a better price for the company s assets or otherwise realise their value; more favourably for the creditors as a whole than would be likely if the company was otherwise wound up; or in certain circumstances, realise the value of property in order to make a distribution to one or more preferential creditors. An administrator may be appointed by: an administration order made by the court; the holder of a floating charge; the company or its directors.

3 Once appointed the administrator must, within eight weeks, send out a statement to the registrar of companies, the company members and all know creditors setting out proposals for achieving the purpose of the administration or explaining why it cannot be achieved. The proposals may include a CVA or a compromise or arrangement with creditors or members. There are several ways administration can come to an end: an administrator may end the process if he believes the purpose of the administration has been sufficiently achieved; administration will end automatically at the end of one year. This may be extended, for up to six months, with the consent of creditors or the court; an administrator appointed under a court order, who believes that the purpose of the administration cannot be achieved or the company should not have entered administration, may make an application for its end. Alternatively, in these circumstances, a creditors meeting may require the application; Alternatively the administration may end in either a creditors voluntary winding up (if the administrator thinks that all of the secured creditors are likely to be paid and a distribution also made to any unsecured creditors) or dissolution if the administrator thinks that a company has no property with which to make a distribution to its creditors. Voluntary liquidation There are two kinds of voluntary liquidation: members voluntary liquidation (MVL) where the directors believe that the company is solvent and have made a statutory declaration of solvency; creditors voluntary liquidation (CVL) where the directors have not made such a declaration. The declaration of solvency is a statement made by the directors that they have made a full enquiry into the company s affairs and believe that the company will be able to pay its debts in full within twelve months. The declaration is a serious matter since any director signing the statement can be held liable for the company s debts for this period. The directors then convene a meeting at which a liquidator (who must be a licensed insolvency practitioner) may be appointed. A notice must be placed in the Gazette and details of the appointment notified to the Registrar within 14 days. If the directors cannot swear a declaration of solvency, but the company decides at an EGM to wind itself up and nominate a liquidator, the liquidator must convene a meeting of creditors. This creditors meeting may either endorse the liquidator nominated by the company or appoint an alternative. At this point, the powers of the directors cease. The liquidator will wind up the company s affairs by calling in all of the company s assets and distributing them to its creditors. If anything is left over it will be distributed it among the members of the company.

4 If the liquidator of an MVL becomes aware that the company will not be able to pay its debts in full in accordance with its declaration of solvency, he must call a meeting of creditors, and the liquidation will become a CVL from the date of that meeting. The liquidator must present a full progress report to a final meeting of creditors and members of the company, and send a copy to the Registrar of Companies within one week of the meeting. Unless the court makes an order deferring the dissolution of the company, it is dissolved three months after the return and account are registered at Companies House. Compulsory liquidation Compulsory liquidation takes place when the company is ordered by a court to be wound up. This may be triggered by a petition of a creditor or on the grounds that the company cannot pay its debts. The court may also order the company to be wound up on the petition of: the company itself, its directors or one or more of its members; the Secretary of State for Business, Innovation and Skills; the Financial Conduct Authority, or the Official Receiver (OR). The OR becomes liquidator on the making of a winding-up order against a company, unless the court orders otherwise. He has a duty to investigate the company s affairs and the causes of its failure. The OR also decides whether to call meetings of the creditors and contributories for the purpose of appointing another liquidator in his place. The company will be dissolved three months after Companies House receives notice that the winding-up is complete. Creditor order of priority This is the order of priority of the main types of creditor in insolvency proceedings: Fixed charge holders; Insolvency practitioners fees and expenses; Preferential creditors (such as staff wages and holiday pay claims); Floating charge holders; Unsecured creditors. Directors of an insolvent company When a company has failed, the Official Receiver or the insolvency practitioner (IP) acting as liquidator, administrative receiver, administrator or the OR must report to the Secretary of State on the conduct of all directors who were in office in the last three years of the company s trading. He has to decide whether it is in the public interest to seek a disqualification order against a director. Examples of behaviour which could lead to disqualification are: continuing to trade when the company was insolvent, to the detriment of its creditors;

5 failing to keep proper accounting records; failing to prepare and file accounts or make returns to Companies House; failing to send in tax returns or pay to the Crown any tax that is due failing to co-operate with the OR or IP. Exeter Barnstaple Heathfield Millennium House, Brannam Crescent, Roundswell Business Park, Barnstaple EX31 3TD T: Michael House, Castle Street, Exeter EX4 3LQ T: Pullman House, Battle Road, Heathfield TQ12 6RY T: Holsworthy Honiton Okehampton 12 The Square, Holsworthy EX22 6DL T: Unit 3 The Threshing Barn, Woodhayes Farm, Honiton EX14 4TP T: Fore Street, Okehampton EX20 1AD T: Please note: The above resource is provided for general information only. No responsibility can be accepted by Simpkins Edwards LLP for any use made of the information presented, whether acting or refraining from action as a result of the material published. No action should be taken without consulting a professional adviser.