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Corporate Insolvency

Rescue Procedures

When a company reaches a stage where formal insolvency procedures must be put in place, the insolvency practitioner’s primary objective must be to maximise the return for the company’s creditors.  This is generally best achieved by keeping the company trading whereby the business can continue to operate and generate cash for the creditors or it can be sold as a going concern. 

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

• Company Voluntary Arrangement (CVA)
• Administration
• Administrative Receivership

Company Voluntary Arrangement (CVA)

A Voluntary Arrangement for a company is a procedure whereby a plan of reorganisation takes place, which may involve delayed or reduced payments of debt, capital restructuring or an orderly disposal of assets.  It requires the approval of the creditors (75% majority in value).  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 was designed primarily as a mechanism for business rescue.

Administration

A Licensed Insolvency Practitioner is appointed as an administrator by the Court under an administration order.  The order is usually sought through a petition by a company that is, or is likely to become, insolvent.  The procedure is designed to hold a business together while plans are formulated to rescue the business, maximise asset realisations or put forward alternative procedures.

The principal parties who can make an application for an order are banks with qualifying and enforceable floating charges, the company or its directors, any creditor of the company, the company’s liquidator or a CVA supervisor.

The company will be placed under the day-to-day control and management of an administrator.  Within 8 weeks he must then formulate proposals for fulfilling the purposes of the order and present them to the creditors at a creditors’ meeting within 10 weeks.  Once under an order, the company is protected from creditors who cannot disturb the business or recover any assets without the permission of the Court.  The administration may be followed by the rehabilitation of the company and its return to the control of its directors, a Company Voluntary Arrangement or Liquidation.

Administration Receivership

If a company breaches the terms of its borrowing from a creditor with a floating charge, that creditor is entitled to appoint an Administrative Receiver to recover its debts.  The Receiver takes control of the company’s assets so that they can be realised primarily for the benefit of the security holder – any surplus assets left after completion of the receivership are returned to the company.

Liquidations

Regrettably, it is often not possible to sell a business, perhaps because in a “people business” key people have left or because that type of business is not seen as viable under current economic conditions.

Any one of these reasons can lead to a company being placed in 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 only a very few exceptions, the end of the road for a company and it will then be removed from the companies register.

The liquidation process can be applied to a solvent or insolvent company.  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 interest, within 12 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.

Creditors Voluntary Liquidation (CVL)

When a company is insolvent and there is no hope of saving the business, the only option left is for the members (shareholders) to pass a resolution to wind up the company.  A meeting of creditors is called to consider the winding up and the appointment of the Liquidator who will realise the assets and pay creditors according to their rights in the Liquidation.  The Liquidator will be a Licensed Insolvency Practitioner.

Members Voluntary Liquidation (MVL)

When the business carried on by a company has come to the end of its normal cycle or, after selling the business, there is nothing left but cash and a few other assets, the owners of the company may decide to wind-up the company – this procedure  is carried out by way of Members Voluntary Liquidation.  The members appoint a Liquidator and he distributes the assets according to their wishes.  Very often there are important tax considerations to bear in mind.

Compulsory Liquidation

In these circumstances, the company is wound up by an order of the court, usually on the petition of a creditor.  The Liquidator will be the Official Receiver but in certain circumstances the court may appoint a Licensed Insolvency Practitioner to carry out the functions of the Liquidator.

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