Formal Insolvency Procedures
If a corporate rescue or restructuring is not possible, the Directors will need to consider one of the more formal insolvency procedures allowed for by the Insolvency Act 1986. These are:
Whilst a Company Voluntary Arrangement [Link to Company Voluntary Arrangement document] is also a formal insolvency procedure, and is often used as an exit from Administrations, we prefer to consider this as a more flexible procedure which stands on its own merits.
Your circumstances will determine the most appropriate route and professional advice should be taken before deciding which route to follow.
Administration
There are cases where it is simply not possible to reach a compromise with creditors, or where the rapid movement of events is restricting possibilities. All is not lost under these circumstances.
It is possible for a creditor or the company’s directors or partners to apply to the court for an order to place the company in Administration. This allows a Licensed Insolvency Practitioner to take control of the company, the creditors claims are frozen whilst a solution is worked out and proposals are made to the creditors. Generally these proposals will result in one of the following outcomes:
- Sale of the business and assets, followed by a liquidation to enable funds to be passed to the unsecured creditors
- The agreement of a Company Voluntary Arrangement [Link to Company Voluntary Arrangement document]
- In the absence of alternatives, a sale of the assets to repay the secured creditors after which the company may be struck off if there are no funds for other creditors and if there are no issues of further investigation by a Liquidator.
The process involves the court and the filing of appropriate documents. On filing, a legal stay against actions by the creditors is granted and a breathing space is obtained in which to develop further proposals. Ideally jobs are saved and the returns to creditors enhanced.
Administrations must be concluded within a year of the granting of the order.
There can be clear advantages in using this procedure over Liquidation as Liquidation generally does not involve any trading activity.
Although the Administrator can be proposed to the Court by the Directors, the secured lenders will often have a say in the process. Before a Court will grant an Order, the Court must be satisfied that the secured creditor has been provided with proper notice and has not registered any objection; usually they prefer their own nominees to be appointed.
Administrative Receivership
Any secured creditor, on a default under the lending document or mortgage, can appoint an Administrative Receiver whose job will be to realise the business assets and pay off the secured creditor and preferential claims (employees) as far as those realisations allow. Charges registered after the Enterprise Act 2002 do not have this option and will instead need to use the Administration route to realise their security.
Liquidations:
A liquidation is a terminal process. Once appointed the Liquidator realises the assets, investigates the events leading up to his appointment and prepares a report on the Directors conduct. He will consider whether there is any scope for raising claims for antecedent events such as Wrongful Trading, preference and transactions at an undervalue and if necessary bring appropriate claims.
If there are funds to distribute, claims will be agreed and payments made. The Liquidation process is not a fast one – and will typically take between 1 and 3 years to fully complete.
There are 2 different types of insolvent liquidation. Whilst the duties and actions of the Liquidator are broadly the same, the manner of his appointment are different and are viewed differently when considering if the Directors have properly discharged their duties. These are:
- Compulsory Liquidation - this follows an application to Court by a creditor, usually after a Statutory demand, which if not satisfied is sufficient evidence for the Court to make the Winding Up order. The Official Receiver usually becomes the Liquidator and will often convene a meeting of creditors to pass the case to a Licensed Insolvency Practitioner.
This process is both cumbersome and long winded and ultimately more costly.
If the directors allow this to happen it can be argued that they have not taken all the steps they should have to protect the creditors’ interests and thus may be open to criticism or censure.
- Creditors Voluntary Liquidation (CVL) – a CVL typically takes 2 or 3 weeks to set up although can in some cases be quicker. The directors, under the guidance of a Licensed Insolvency Practitioner, convene meetings of Members and Creditors to receive a report on the state of the company and its Statement of Affairs. Then they consider who should be the Liquidator – decisions being a simple majority of those creditors who chose to attend or participate by proxy.
This is the most usual form of the process.