Comparison of Company Insolvency Procedures

There are five categories of insolvency procedure for companies in England, Wales and Northern Ireland. These are:

Company Voluntary Arrangement (CVA)

Administration

• Administrative Receivership

Creditors’ Voluntary Liquidation (CVL)

Compulsory Liquidation (winding up by the court)

Receivers may also be appointed under fixed charges (fixed charge receiverships) on specific assets owned by a company. These are not technically insolvency appointments as such appointments may be made irrespective of the solvency of the company. There is also members’ voluntary liquidation (MVL), but this only applies to solvent companies and is instituted by the shareholders. Companies involved in this procedure are, by definition, able to pay all their creditors, and are often wound up simply because they have outlived their usefulness.

Insolvent partnerships in England, Wales and Northern Ireland are subject to compulsory liquidation, not CVLs, but the partners, because of the relationship between them and the partnership may individually be made bankrupt or enter individual voluntary arrangements (see Section 6 – Personal Insolvency).

In addition, a partnership may enter a modified CVA or an administration.

Of the above procedures, the first three may be used as vehicles for business rescue, whereas liquidation is a terminal process for the company and usually marks the end of the business activities as well. Each procedure is explained in further detail on the following pages. Fixed charge receiverships and Members’ Voluntary Liquidations are explained under ‘Other Procedures’ at the end of this section, together with details of a further procedure, the scheme of arrangement.

 

RESCUE PROCEDURES

When a company reaches the stage where formal insolvency procedures must be instituted, the primary objective for the licensed insolvency practitioner is to realise the greatest return for the company’s creditors. Depending on the stage at which the company realises it is in trouble, the best return is almost always most successfully achieved by keeping the company’s business operating. This enables two possibilities: either the business can continue to operate and generate cash for the creditors, or it can be sold on as a going concern. Companies with businesses that can be sold on as going concerns almost always have a much higher realisable value than the liquidated assets of the company or its businesses, and therefore provide greater returns for the creditors. Often however a company is hopelessly insolvent and beyond saving. In such cases, liquidation is the only option, and this is discussed further below.

A number of procedures are available to enable the continuation of a company’s business or businesses:

• Company Voluntary Arrangement (CVA)

• Administration

• Administrative Receivership

A company voluntary arrangement is a procedure which enables a company to put a proposal to its creditors for a composition in satisfaction of its debts or a scheme of arrangement of its affairs. A composition is an agreement under which creditors agree to accept a certain sum of money in settlement of the debts due to them. The procedure is extremely flexible and the form which the voluntary arrangement takes will depend on the terms of the proposal agreed by the creditors. For example, a CVA may involve delayed or reduced payments of debt, capital restructuring or an orderly disposal of assets.

The proposed arrangement requires the approval of at least 75% in value of the creditors, and once approved is legally binding on the company and all its creditors, whether or not they voted in favour of it. There is limited involvement by the court, and the scheme is under the control of a licensed insolvency practitioner acting as a supervisor.

The CVA procedure was introduced by the Insolvency Act 1986 and was designed primarily as a mechanism for business rescue. The procedure is also often used instead of liquidation as a means of distributing funds on the conclusion of (and, occasionally, during) an administration.

A modified CVA may also be applied to insolvent partnerships.

 

PROCEDURE FOR CVA

1. Proposal – May be made by directors, administrator or liquidator.

2. Nominee – Insolvency practitioner nominated under terms of proposal to supervise its implementation. Where the company is in administration or liquidation, the administrator or liquidator may act as nominee.

3. Where nominee is not administrator or liquidator – Nominee notifies the court whether, in his opinion, a meeting of creditors should be held in order to consider the proposal.

4. Where nominee is administrator or liquidator – Nominee proceeds directly to convene creditors’ meeting.

5. Creditors’ meeting – Usually held within eight weeks of the notice of proposal to nominee. May approve, modify or reject proposal and may choose another nominee. Requires a majority of 75 % in value of the creditors present and voting. The proposal may not affect the rights of secured or preferential creditors without their assent.

6. Supervisor – If the proposal is approved, the nominee becomes the supervisor and implements the arrangement in accordance with the terms of the proposal.

 

ADMINISTRATION

Administration is a procedure available to a company that is insolvent, or is likely to become so, which places the company under the control of an insolvency practitioner and the protection of the court with the following objectives:

1.  rescuing the company as a going concern

2. achieving a better result for the creditors as a whole than would be likely if the company were wound up without first being in administration or, if the administrator thinks neither of these objectives is reasonably practicable

3.  realising property in order to make a distribution to secured or preferential creditors.

While a company is in administration creditors are prevented from taking any actions against it except with the permission of the court.

Reforms were introduced by the Enterprise Act 2002 to encourage the use of administration as the preferred vehicle for company and business rescue within formal insolvency.

An administrator may be appointed:

• by an order of the court, on application by the company, its directors, one or more creditors, or, if it is in liquidation, its liquidator

• without a court order, by direct appointment by the company, its directors or a creditor who holds comprehensive security of a type which qualifies him to make such an appointment.

A secured creditor who is qualified to make an appointment may also intervene where the company has made an application to the court. This means that the secured creditor’s choice of administrator will prevail.

An administrator’s powers are very broad. They include powers to carry on the company’s business and realise its assets. The administrator displaces the company’s board of directors from its management function and has the power to remove or appoint directors. The administrator must prepare proposals for approval by the creditors setting out how he intends to achieve the purpose of administration.

There is a one year time limit within which the administration must be concluded, but this period can be extended with the agreement of the creditors or the permission of the court if more time is needed to achieve the purpose of administration. The administration may also come to an end if the administrator thinks the purpose of administration has been achieved or cannot be achieved.

On conclusion of an administration:

• the company may be returned to the control of its directors and management

• the company may go into liquidation

• the company may be dissolved (if there are no funds for distribution to unsecured creditors)

• if a voluntary arrangement has been agreed during the administration, the arrangement may continue according to its terms. (It is possible for a voluntary arrangement to run concurrently with an administration).

 

PROCEDURE FOR ADMINISTRATION

A. Appointment by court order

1. Company is, or likely to become, unable to pay its debts

2. Application to the court – Presented by company, directors, creditors or liquidator, with supporting statement by proposed administrator that the purpose of administration is reasonably likely to be achieved. Notice given to charge holder qualified to appoint an administrator, who thereby has an opportunity to apply to the court for the appointment of an alternative administrator.

3. Administration Order – Administrator appointed. Winding-up petition (if any) dismissed.

B. Appointment by company or directors without court order

1. Company is, or is likely to become, unable to pay its debts

2. Notice of intention to appoint – Notice filed at court. Notice (five days) given to charge holder qualified to appoint an administrator, who thereby has an opportunity to appoint an administrator of his choice. 

3. Appointment – Notice of appointment filed at court, together with statement by administrator that the purpose of administration is reasonably likely to be achieved.

C. Appointment by secured creditor without court order

1. Security must be enforceable

2. Notice of intention to appoint – Notice (two days) given to holder of any prior floating charge. Copy of notice may also be filed at court to obtain interim protection.

3. Appointment – Notice of appointment filed at court, together with statement by administrator that the purpose of administration is reasonably likely to be achieved. Winding-up petition (if any) suspended.

Following appointment

1. Consequences of appointment – No administrative receiver can be appointed. Security over assets cannot be enforced without consent of the secured creditor. Administrator can sell property subject to hire-purchase, mortgage, and retention of title, with court’s permission.

2. Duties of Administrator – Manages the business. Proposal for future conduct. Calls meeting of creditors.

3. Creditors’ Meeting – Held within 10 weeks of company entering administration. Proposal approved, modified or rejected. Majority in value of those voting required to approve proposal. In some circumstances a meeting is not necessary.

4. Implementation – Administrator reports back to court. Proposal implemented.

 

ADMINISTRATIVE RECEIVERSHIP (England, Wales and Northern Ireland)

Administrative receivers are normally appointed by a bank or other lending institution which has as security for a loan (under a floating charge) the who substantially the whole, of a company’s property. This is often abbreviated simply to receivership. The ability to appoint normally arises when the company is in default or in breach of the terms of its borrowing.

The charge is contained in a document known as a debenture, which will frequently also include fixed charges and the lender is often referred to as debenture holder. This does not have to be just one bank; it could be, and often is, a consortium of banks or other lenders.

The administrative receiver has similar powers to the administrator described above. He can continue to operate the business, and often does, whilst trying to sell it as a going concern. If he manages to do this he will usually achieve a higher price than if the company’s assets were disposed. The money realised by the receiver is distributed to the creditors in the manner described in Section 2 – What Happens in an Insolvency, above.

It should be noted that an administrative receiver has no authority to deal with the claims of unsecured creditors (eg trade creditors). If sufficient funds become available for distribution to the general body of creditors they must be dealt with by a separately appointed liquidator.

It is longer possible to appoint an administrative receiver under a security instrument created after 15 September 2003. Instead, creditors with floating charge security can appoint an administrator (see above).

 

PROCEDURE FOR ADMINISTRATIVE RECEIVERSHIP

1. Only available to a lender with a floating charge security (usually a bank)

2. When to Appoint – When the borrower is in default or in breach of terms of the security document. Usually follows a demand for repayment, frequently at request of directors (although only the lender can actually appoint a receiver).

3. Appointment – Made by the secured lender. A receiver may be appointed with maximum speed and minimum formality. The appointor notifies Companies House, the receiver notifies the company and creditors. The receiver also advertises the appointment in the London Gazette and an appropriate newspaper.

4. Powers and Capacity of Receiver – Depend on the security document, but will normally enable the receiver to carry on a company’s business and realise its assets. The receiver acts as the agent of the company unless and until it goes into liquidation.

5. Information to Creditors – Within three months of appointment, the receiver must send a report to the creditors and convene a creditors’ meeting to receive the report (unless a liquidator has been appointed in the meantime, in which case the report goes only to the liquidator). The meeting may also appoint a creditors’ committee.

6. Conclusion of Receivership – The receiver ceases to act when he has realised the security or repaid his appointor and notifies Companies House accordingly.

 

LIQUIDATIONS

Regrettably, it is often not possible to sell a business, perhaps because in a ‘people business’ everyone has left or because that type of business is not seen as viable under current economic conditions. It is also often the case that the directors of a company do not seek help in sufficient time to allow the company to be saved, and by the time they do so it is hopelessly insolvent. Any of these reasons can lead to a company being placed into liquidation and its assets sold off. The proceeds of the sale are then distributed to the creditors, in a defined order of priority. Liquidation is, with very few exceptions, the end of the road for a company and it will then be removed from the companies register.

A liquidation may be solvent or insolvent. A solvent liquidation is known as a members’ voluntary liquidation (MVL), in which the liquidator is appointed by the shareholders and the company’s assets are sufficient to settle all its liabilities, including statutory interest, within twelve months. An insolvent liquidation will be either a creditors’ voluntary liquidation (CVL), which is begun by resolution of the shareholders, or a compulsory liquidation, which is instituted by petition to the court.

Liquidation may occur in a number of ways. It may occur following a receivership or administration. The company’s directors or shareholders may recommend that the company be put directly into liquidation via either a CVL or MVL. Alternatively, a court can make a winding-up order for a compulsory liquidation on the application of a creditor or of the company itself. The company itself is simply a legal entity, and may not be sold with the business, which will frequently be transferred to another company. Therefore, if the company’s business has been sold on the company will be liquidated and the creditors will be given their share from the proceeds of the sale.

In an MVL the liquidator is appointed by shareholders. In a CVL the appointment is made by the shareholders subject to confirmation or replacement at the creditors’ meeting by the creditors, and in a compulsory liquidation the creditors nominate the liquidator. MVLs are explained at the end of this section, under ‘Other Procedures’.

 

COMPULSORY LIQUIDATION (England, Wales and Northern Ireland)

A compulsory liquidation (or compulsory winding up) is a liquidation which is ordered by the court, usually on the petition of a creditor, the company or a shareholder.

There are a number of possible reasons for making a winding-up order. The most common is because the company is insolvent.

Insolvency can be established by failure to comply with a statutory demand requiring payment within 21 days, or by an execution against the company’s goods which remains unsatisfied.

A winding-up petition may also be presented by the Secretary of State for Trade and Industry on the grounds of public interest.

The company to be liquidated is first referred by the court to the official receiver, who is a civil servant and an officer of the court, and usually becomes liquidator on the making of the winding-up order. If the assets are likely to cover the administrative costs, the official receiver will usually call a creditors’ meeting to appoint a liquidator, otherwise he will remain in office. In some cases, the official receiver may, using powers delegated to him by the Secretary of State for Trade and Industry, appoint a professional liquidator direct. The official receiver retains responsibility for investigating the conduct of directors and other officers as well as any other investigation work required.

Where a compulsory liquidation follows immediately on an administration, the court may appoint the former administrator to act as liquidator. In these cases, the official receiver does not become liquidator, but retains an investigative duty.

A compulsory liquidation is the only form of liquidation that may be applied to insolvent partnerships in England, Wales and Northern Ireland. Such circumstances may result in individual partners entering bankruptcy or individual voluntary arrangements.

 

PROCEDURE FOR COMPULSORY LIQUIDATION – ENGLAND, WALES AND NORTHERN IRELAND

1. Petition – Usually presented by a creditor on grounds of insolvency. May also be presented by the company itself or the shareholders. Petition is usually advertised in the Gazette.

2. Winding-up order made by the court

3. Official receiver – Becomes liquidator by virtue of the winding-up order (unless the court appoints a former administrator). Has a duty to investigate the company’s affairs and send a report to the creditors. Advertises order in Gazette and appropriate newspaper. The official receiver may call a meeting of the creditors to appoint an insolvency practitioner as liquidator in his place.

4. Creditors’ meeting – Convened by the official receiver within four months of the winding-up order. Liquidator is appointed by a straight majority, in value, of the creditors. Meeting may also establish liquidation committee.

5. Duties of liquidator – Realise assets. Agree creditors’ claims and distribute funds by way of dividend. Call final meeting of creditors. Creditors receive an account and report of the liquidation.

 

Creditors’ Voluntary Liquidation (CVL)

A CVL is a liquidation begun by resolution of the shareholders, but is under the effective control of the creditors, who can appoint a liquidator of their choice. Because of changes in legislation placing greater onus of responsibility on the directors of a company, the CVL is the most common way for directors and shareholders to deal voluntarily with their company’s insolvency. This is because it is in the interests of the directors to take action at an early stage, in order to minimise the risk of personal liability for wrongful trading. Furthermore, unlike a compulsory liquidation, a CVL does not bring the directors’ conduct under the scrutiny of the official receiver, although the liquidator is required to report to the DTI on the conduct of the directors.

It is also possible for a liquidation to proceed as a CVL without the need for a creditors’ meeting, where it follows immediately on the conclusion of an administration and there are funds available for the unsecured creditors. The liquidator will be the administrator, or other person previously approved by the creditors.

PROCEDURE FOR CVL

1. Directors consult a licensed insolvency practitioner

2. Calling of meetings – Notice and proxy forms sent to shareholders and creditors. Creditors’ meeting advertised in the Gazette.

3. Shareholders’ meeting – Extraordinary resolution to wind up and an ordinary resolution to appoint a liquidator. (95% in value of shareholders can agree to short notice).

4. Creditors’ meeting – Must be within 14 days of shareholders’ meeting (but usually follows immediately).

5. Statement of affairs and report on history of business and causes of failure presented to meeting

6. Shareholders’ nominee remains as liquidator unless majority by value of creditors voting appoint an alternative

7. Appointment of liquidation committee

8. Duties of liquidator – Realise assets. Investigate company’s affairs. Agree creditors’ claims and distribute funds. Hold annual meetings of creditors. Call final creditors’ meeting. Creditors to receive an account and report of the liquidation.

 

OTHER PROCEDURES

 

Fixed Charge Receivership (England and Wales)

Receivers may also be appointed by secured creditors over specific assets covered by a fixed charge, such as properties, aircraft, machinery or book debts. The appointment of receivers over properties is partly governed by the Law of Property Act 1925 (LPA) and such receivers are sometimes known as LPA receivers. Receivers under fixed charges have more restricted powers than administrative receivers, with no general powers of management over the company. Such receivers do not need to be licensed insolvency practitioners and such procedures are not generally suitable for company rescue. Fixed charge receiverships are not used in Scotland. Secured creditors simply repossess the subjects of their mortgage.

Scheme of Arrangement

A term normally used to describe a compromise or arrangement between a company and its creditors or members or any class of them under section 425 of the Companies Act 1985, which may involve a scheme for the reconstruction of the company. If a majority in number representing three fourths in value of the creditors or members or any class of them agree to the compromise or arrangement it is binding, provided it is sanctioned by the court. Section 425 may be invoked where there is an administration order in force in relation to the company, where there is a liquidator or provisional liquidator in office, or where the company is not subject to any insolvency proceedings.

Members’ Voluntary Liquidation (MVL)

An MVL can only be used for a solvent company, and is under the control of the shareholders, who appoint the liquidator. There may be a number of reasons for closing down a solvent company. The proprietors may wish to unlock their capital and retire, or a group of companies may wish to close down a subsidiary which has outlived its usefulness and only exists on paper. MVLs are also used in corporate restructurings.

PROCEDURE FOR MVL

1. Declaration of solvency – Directors must swear the declaration within five weeks preceding the resolution to wind up. It must embody a statement of the company’s assets and liabilities and a statement that all creditors have been paid in full, with interest, or will be within twelve months. It is a criminal offence to swear a false declaration.

2. Resolution to wind up – Extraordinary meeting of members on 21 days’ notice to pass resolution to wind up. No meeting of creditors required.

3. Appointment of liquidator – By ordinary resolution of members immediately after the passing of the resolution to wind up.

4. Duties of liquidator – Realise assets. Settle and pay creditors’ claims plus statutory interest. Distribute surplus to members. Hold final meeting of members.

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