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:
• 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.
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.
This is a mechanism whereby a company can be rescued,…