Insolvency Q&A

Insolvency

What is Insolvency?

A company or individual is deemed insolvent if they can’t pay their debts as and when they fall due.

Inability to pay debts is defined broadly in the Insolvency Act as:

  • Unable to pay debts as they fall due (known as the cash flow test)
  • Liabilities greater than the value of its assets (known as the balance sheet test)
  • Unsatisfied county court judgement or statutory demand

Where a company or individual is deemed to be insolvent, there may be suitable insolvency procedures available for handling the affairs.

What is an Insolvency Practitioner?

An insolvency practitioner is the person appointed to deal with the insolvent company or individual and will act as the office-holder. It’s possible for more than one insolvency practitioner to be appointed to act jointly as office-holders on a case.

In order to act, an insolvency practitioner must, since 1986, have passed the Joint Insolvency Examination Board (JIEB) examinations and be licensed to act by an authorising body.

Our member firms have licensed insolvency practitioners, who are authorised to act by the Institute of Chartered Accountants in England and Wales.

What is an Official Receiver?

An official receiver (also known as the OR) is a civil servant in the insolvency service and is an officer of the court. They are notified by the court about all bankruptcy or winding up orders.

The official receiver is responsible, through their staff, for administering the initial stage (at least) of all bankruptcy and compulsory liquidations. This includes collecting and protecting any assets and investigating the causes of insolvency.

What is Liquidation?

Liquidation is a legal process to wind up the affairs of a limited company. There are three types of formal liquidation that a company can enter:

  1. Compulsory liquidation
  2. Creditors’ voluntary liquidation
  3. Members’ voluntary liquidation (only available for solvent companies)

Either the official receiver (compulsory liquidations only) or an insolvency practitioner will be appointed as liquidator. The role of the liquidator is to oversee the winding up of the company’s affairs; realise the company’s assets; pay dividends to creditors and, in the case of a solvent liquidation, make distributions to shareholders.

What is Compulsory Liquidation?

A compulsory liquidation is a court based process for winding up the affairs of a limited company.

The liquidation procedure begins with the making of a winding-up order through the courts. The order is made following the presentation of a petition, usually by a creditor or director of the company.

Directors will have no control over the timing of this procedure, which typically takes a minimum of two months, and it’s extremely rare for any part of a business to be rescued once it’s entered compulsory liquidation.

Either the official receiver or an insolvency practitioner will be appointed to deal with the liquidation process and the business ceases to trade immediately.

Directors are encouraged to contact one of our insolvency practitioners to discuss whether a creditors’ voluntary liquidation (CVL – see below) will help achieve their objectives in a more planned and orderly manner.

What is a Creditors’ Voluntary Liquidation (CVL)?

This is the most common type of liquidation used in England.

A CVL is initiated by the directors and involves the passing of resolutions by shareholders to wind up the company and appoint an insolvency practitioner of their choice as liquidator.

There’s greater involvement of the directors and more opportunity for a controlled sale of the assets. This procedure can take effect in a matter of days.

What is a Members’ Voluntary Liquidation (MVL)?

An MVL is a formal process of bringing the company to an end in order for the remaining assets to be distributed to its shareholders. This is commonly used when a company has fulfilled its purpose or the current management wishes to retire and there’s no succession plan. The company must be solvent (i.e. it can pay all of its creditors in full).

An MVL can be a highly tax efficient method of distributing the surplus assets in a business back to its shareholders. Often the shareholders will qualify for reduced tax rates due to eligibility for entrepreneurs’ relief.

Contact one of our insolvency specialists today to see if an MVL is the best option for disposing of your solvent company.

What is Administration?

Administration is a rescue procedure with a variety of exit strategies. The administration process provides a statutory moratorium to prevent creditors from taking legal action.

There are three entry routes into administration:

  1. By an order of the court
  2. Appointment by a qualifying floating charge holder
  3. Appointment by the company or its directors

Administrators will often continue to trade the business in order to complete outstanding work in progress, to facilitate a sale of part/all of the business or to provide time to propose a company voluntary arrangement to creditors.

An insolvency practitioner must be appointed as administrator to manage the company’s affairs during administration.

What is a Pre-Pack Administration?

A pre-pack administration is where a sale of the company’s business and assets is completed by the administrator prior to the meeting of creditors to consider the administrator’s proposals.

Typically, the sale is completed immediately or shortly after the appointment of the administrator. The deal will have been discussed and agreed in principle prior to the application to place the company into administration and should provide the best deal for creditors.

A pre-pack can be a suitable option where the business would no longer be viable if it were traded under administration, there are insufficient funds to trade the business and the value of the business would be lost upon insolvency or the assets were of a perishable nature.

Pre-packs are highly regulated and specific guidance has been published in the form of Statement of Insolvency Practice 16.

It’s possible for the existing board of directors or company shareholders to acquire the company business and assets from the administrator. Additional regulations are in force for governing pre-pack sales to connected parties.

What is a Voluntary Arrangement?

A voluntary arrangement can be proposed by the following:

  • A company – company voluntary arrangement (CVA)
  • An individual – individual voluntary arrangement (IVA)
  • A partnership – partnership voluntary arrangement (PVA)

These arrangements are formally binding agreements that set out the basis and terms under which the debts will be repaid (not necessarily in full). In order to be approved they will require the consent of 75% or more of the creditors but, once approved, will legally bind 100% of creditors.

Voluntary arrangements provide greater flexibility and fewer restrictions for the proposer. This usually allows trading or employment to continue and from which funds can be introduced over a period of time (often 3-5 years). Alternatively, the arrangements can provide some breathing space whilst assets are sold (i.e. properties). Additionally, third party funds can be introduced as a lump sum.

An insolvency practitioner is appointed as supervisor of the voluntary arrangement for the purposes of ensuring that the terms of the arrangement are adhered to.

What is Bankruptcy?

Bankruptcy is a process for dealing with the affairs of an insolvent individual. It’s initiated in one of two ways:

  1. A creditor, who must be owed at least £5000, can petition the court for a person’s bankruptcy. A judge will determine whether a bankruptcy order should be made at a hearing.
  2. Alternatively, an individual can submit an online application for their own bankruptcy. The application is considered by an adjudicator who will decide if they should be made bankrupt.

The official receiver will initially act as trustee but an insolvency practitioner may replace them.

The individual will lose control of all assets belonging to or vested in them at the commencement of the bankruptcy. The trustee is responsible for realising those assets and paying dividends to creditors (where possible).

Individuals are encouraged to contact one of our insolvency practitioners to discuss whether an individual voluntary arrangement is suitable and could help them avoid bankruptcy proceedings.

Can I Strike Off/Dissolve an Insolvent Company?

The Companies Act allows the directors of a company to make an application for a company to be struck off and dissolved. The directors are not prohibited from making such application due to the company being insolvent. However, the www.gov.uk website provides the following guidance:

“This procedure is not an alternative to formal insolvency proceedings where these are appropriate. Even if the company is struck off and dissolved, creditors and others could apply for the company to be restored to the register.”

To add further to the point above, a dissolved company can be reinstated to the register and a petition to wind up the company could then be made. We therefore recommend that directors consider formal insolvency proceedings for dissolving a company.

How can I put my Company into Liquidation?

In order to place your company into a creditors’ voluntary liquidation, the directors will need to hold a board meeting and convene a meeting of the company’s shareholders. You’ll need 75% of the company’s shareholders to vote in favour of passing a winding up resolution and an insolvency practitioner who is willing to act as liquidator of the company.

Following the introduction of the insolvency rules 2016, there are now varying routes for engaging with creditors as part of the appointment process. It’s advisable to engage an insolvency practitioner to help you through the legal process.

When Should I Seek Advice?

Seek advice as soon as you become aware that the company may not be able to pay its debts as they fall due. Failure to get advice early may result in reduced options being available for the company. Speak to one of our insolvency practitioners today to arrange a free confidential consultation.

When Should my Company Stop Trading?

When a company should cease trading depends on the circumstances of the company. Typically, a company will cease to trade when the directors reach an agreement that the company ought to be placed into insolvent liquidation. You should not continue to trade if there’s no prospect that you’ll be able to pay your debts as and when they fall due. Continuing to trade beyond this point could have further consequences for the directors.

My Company has Just Been Served With a Winding-Up Petition. What Should I do?

Timing is key if your company has been served with a winding-up petition. The petitioning creditor will be entitled to advertise the petition in the London Gazette seven days after serving it on the company. Once the petition is advertised, it’s likely that the company’s bank account will be frozen, which could have severe consequences for your business.

If the debt is disputed then it’s likely that you’ll need to seek legal advice. We can provide you with contact details for a number of lawyers who are suitably experienced in dealing with these matters. If the company doesn’t dispute the debt then you should seek advice from an insolvency practitioner as soon as possible. It may still be possible to avoid the company entering compulsory liquidation.

How Much Will it Cost to Wind up a Company? I’m Looking for a Cheap Liquidation

The costs of winding up a company will vary depending on the size of the company, the complexity of the case and the nature of the assets the liquidator has to deal with. Contact one of our insolvency practitioners to get a competitive quote.

Who Pays to Wind up a Company? Who is Liable for the Liquidator’s Costs?

The costs of assisting directors with placing a company into liquidation and acting as liquidator are payable out of the funds realised from the sale of the company’s assets. The directors are not liable to contribute to the costs. However, if there are no assets to pay the costs of liquidation then a director can choose to meet the costs personally.

Am I Liable for Company Debts? Can a Director be Liable for Company Debts?

Ordinarily a director of a limited company is not personally liable for the debts of a company. However, a director may have personal liability in respect of a debt if they have provided a personal guarantee (PG). It’s not uncommon for banks to seek security in the form of a PG from one or more of the directors when a company applies for credit.

A director could also become liable to contribute to the assets of a company if it can be shown that they have acted incorrectly. Directors in the UK are legally considered to have ‘fiduciary duties’ which means that, in the event of insolvency, they are duty-bound to act in the interests of the company’s creditors and not of themselves.

Will my Personal Guarantee be Called Upon by the Bank?

It’s common for the bank to contact directors who’ve provided a personal guarantee upon the liquidation of the company; however, early negotiations with the bank will leave the director more options.

My Company has Gone Bust, can I Still be a Director?

Being a director of a company that enters formal insolvency proceedings does not automatically prohibit you from continuing to act or taking new directorship appointments.

Can I Start up a New Limited Company Immediately?

You’re entitled to set up a new company immediately (assuming there are no matters affecting your ability to act, such as disqualification or being an undischarged bankrupt). However, there may be some restrictions, such as trading with a prohibited name. Our insolvency practitioners can provide further information.

Will I Have to Attend Court?

A creditors’ voluntary liquidation doesn’t involve the court and allows the director(s) to control the timing and appointment of an insolvency practitioner. However, a compulsory liquidation is a court based process which does require a court hearing. You’re not required to attend the hearing, but failure to attend is likely to result in the judge simply making an order for the company’s winding-up.

Will I Have to Face the Company Creditors?

Historically, a creditors’ meeting would be held as part of the process to place a company into creditors’ voluntary liquidation. A physical meeting, however, is now only held as part of the appointment process, if requested by creditors and certain triggers are met. If a physical meeting is requested, then at least one director is required to attend. During the meeting, there’s opportunity for any questions to be asked of the director(s).

Can I Pay Family Creditors?

Family creditors are likely to fall into the category of ‘associated creditors’ within the definition of the Insolvency Act 1986. Associated creditors who have been repaid in the two years prior to the date of liquidation may be requested to repay these sums to the liquidator.

How Long Does an Insolvent Liquidation Last? When Will the Company be Dissolved?

There’s no definitive timescale for the duration of a liquidation. A liquidator will remain in office until all of the company’s assets have been dealt with. Once the liquidator considers that the administration of the company’s affairs has been concluded, they’ll take formal steps to conclude the liquidation, which will ultimately result in them being released from office. The company will be dissolved at Companies House three months after the final return is lodged by the liquidator.

How Long Does a Solvent Liquidation Last? When Will the Company be Dissolved?

Similar to an insolvent liquidation, there’s no definitive timescale for the duration of a solvent members’ voluntary liquidation. However, there is a legal requirement that all of the company’s creditors must be repaid in full, plus statutory interest, within a period of 12 months. A liquidator will remain in office until all of the company’s assets have been dealt with and the funds have been distributed accordingly. Once the liquidator considers that the administration of the company’s affairs has been concluded, they’ll take formal steps to conclude the liquidation, which will ultimately result in them being released from office. The company will be dissolved at Companies House three months after the final return is lodged by the liquidator.

When do my Director Duties Cease?

Your duties as director cease upon the passing of a winding-up resolution or following an order of the court for compulsory liquidation. However, you have an ongoing legal duty to cooperate with the liquidator. Failure to cooperate with the liquidator or official receiver could result in you being examined at court.

Will my Employees get Paid?

Employees may claim for arrears of wages, holiday pay, redundancy pay and pay in lieu of notice from the redundancy payments service, although certain restrictions will apply. Please note this isn’t an exhaustive list of all items that an employee can claim. The money comes from the Government’s National Insurance fund and they aim to pay within three to six weeks of receiving a claim. The office-holder will issue a fact sheet to employees advising them how to submit claim, which is done via the Government website.

Is the Liquidation Advertised?

Yes. There are a number of statutory notices which are advertised in the London Gazette for both a creditors’ voluntary liquidation and compulsory liquidation. However, advertisements are only placed in regional or national newspapers if the insolvency practitioner considers it appropriate.

Can a Director Purchase Company Assets? Can a Shareholder Purchase Company Assets?

Yes, a director or shareholder is able to purchase the assets of an insolvent company. If a company’s assets are sold prior to an insolvency event then that disposal will be reviewed by the office-holder. An office-holder has the power to overturn such transactions if it can be shown that market value wasn’t achieved for the disposal. However, if the assets are sold to a director/shareholder by a liquidator, then it’s the liquidator’s duty to make sure that fair value has been paid for the assets. A liquidator has a duty to disclose details of transactions with connected parties to creditors.

If you have any questions or if you would like to discuss  your company plans with us, please contact Hannah Farmborough or call on 0207 429 4147 to be put in contact with a member of our Corporate Finance team

This article originally appeared on the blog of our member firm, Larking Gowen.