A company is insolvent if its assets are insufficient to discharge its debts and liabilities. This can either be assessed on a cash-flow basis; unable to pay its debts as and when they fall due, for example, late payment of tax or invoices or when a judgment has been entered or on a balance sheet basis where the company has liabilities in excess of its assets.
If insolvency is even a remote possibility, then the company’s directors need to consider the company’s financial position carefully and take specialist advice, as if the company is or likely to become insolvent then the directors will have a duty to the company’s creditors rather than to its shareholders. The directors could be in breach of their fiduciary duties if they do not take prompt action. Whilst there are a wide range of options available involving refinance or restructuring, if a solution is not possible to avoid insolvency then there are a number of formal procedures to consider:
An administrator (a qualified insolvency practitioner) takes over the management of the company’s trading and affairs. This protects the company from creditor enforcement whilst the administrator assesses the company’s whole operation with a view to reorganising/ restructuring/ rescuing it or selling some or all of its business or assets. If the administrator cannot save the company, then usually it is placed into liquidation.
In some circumstances, an agreement can be negotiated before the administrator is appointed whereby all or some of the company’s business and assets are sold to a third party or a new company involving the existing management. This pre-packaged administration sale (pre-pack) is completed immediately on appointment. This process is highly regulated and requires specialist advice.
A company in liquidation ceases to trade immediately upon being placed into liquidation. The liquidator will sell the company’s assets and distribute the proceeds to creditors.
There are two types of liquidation:
- A compulsory liquidation which follows a winding up order made in the Court or a voluntary liquidation.
- A creditors voluntary liquidation (CVL) is instigated by the company’s directors and following a resolution of the company.
The appointed liquidator has far-reaching powers to investigate the company’s financial affairs in the period leading up to the liquidation with a view to recouping monies or assets which may have been transferred away from the company.
There is a form of voluntary liquidation which requires the company to be solvent. A members’ voluntary liquidation (MVL) is used as a method of winding down the company after settling all of its debts.
Company voluntary arrangement (CVA) and Scheme of arrangement
A CVA is an agreement between a company and its creditors, by which the company compromises its debts or agrees an arrangement for their discharge. The CVA will be administered by an insolvency practitioner and if the necessary majority of creditors approve the CVA, then the CVA will bind all creditors.
A Scheme of Arrangement under Part 26 of the Companies Act 2006 is a similar tool but must be sanctioned by the Court.
Both of these measures might be used in conjunction with administration, where a moratorium gives the company breathing space to agree any proposals with creditors.
The Corporate Insolvency and Governance Act 2020 (CIGA 2020)
CIGA 2020 introduced some further procedures all of which are designed to rescue the company if at all possible. These include a Part A1 moratorium and a Part 26A restructuring plan.
We advise directors, shareholders, creditors and insolvency practitioners in all of these areas.
Risks for Directors
If an insolvent company goes into administration or liquidation, its directors can be pursued in their personal capacity for losses made by creditors if the directors continued to trade after the company had become insolvent (wrongful trading).
There was a temporary suspension of the wrongful trading provisions because of the COVID pandemic but this has now been lifted.
These risks are in addition to any liability that the directors have for any breaches of duty to the company, which the insolvency practitioner will investigate. Antecedent transactions together with the conduct of the directors will be examined and the directors can be called to account for any monies which can be claimed back by the office-holder for the company.
Further powers set out in the Insolvency Act 1986 can be relied upon by an insolvency practitioner if it can be claimed that any business of the company had been carried on with the intent to defraud creditors.
The administrator or liquidator is required to report to the Secretary of State, on the conduct of the directors (including shadow directors) and, if appropriate, the Secretary of State will bring director disqualification proceedings.
The Company Directors Disqualification Act 1986 (CDDA 1986) contains provisions under which a person may be disqualified from acting as a director or taking part in the promotion, formation or management of any company for a period of up to 15 years if his conduct (as a director of a company which has become insolvent) falls below the standard which is expected.
In some cases a director may also be required to compensate creditors who have suffered loss as a result of his actions.
We can advise any director who is facing such action from the Insolvency Service, to respond to the enquiries, deal with Disqualification Undertakings and applications to Court for leave to act when disqualified.
Individual or personal insolvency is when you are unable to pay your debts as and when they fall due. This can occur in many different circumstances, from a liability under a personal guarantee, redundancy or outstanding consumer debt.
Being in financial trouble can be immensely stressful and it is essential to get advice from the right experts when you begin to experience financial difficulties so you can explore what options are available.
For creditors too when attempting to recover money from an insolvent individual it is important to understand the processes and take advice so your interests can be protected.
Bankruptcy is a legal procedure which applies only to individuals. It provides debt relief for people whose circumstances are unlikely to change and who have no hope of paying off their debts within a reasonable time.
In some ways it is a protective remedy but it is also a punishment for those who individuals who incur debts.
To be made bankrupt, a court has to issue a bankruptcy order. This can occur in one of two ways:
You can apply for your own bankruptcy, or
If you owe £5000 or more, one of your creditors (the people you owe money to) can apply to make you bankrupt (following a statutory demand, unsatisfied judgment execution or if you have broken the terms of an IVA)
Bankruptcy will have a serious effect on your life and business as once an order is made:
- your assets belong to (“vest in”) your trustee and can be used to pay your debts.
- Your trustee will investigate your financial affairs for the 5 year period prior to the bankruptcy order
- you must follow certain rules called ‘bankruptcy restrictions’ which include not being able to act as a company director
- your name and details will be published on a bankruptcy register called the ‘Individual Insolvency Register’
- after 12 months you are usually discharged (freed) from your bankruptcy, provided you cooperate with your trustee
Individual voluntary arrangement (IVA)
An IVA is an insolvency procedure, which results in the renegotiation by an individual of the payments due to all of their creditors, or some other form of financial restructuring.
In order for an IVA to succeed, 75 per cent of creditors (by value of debt attending and voting) must meet and vote its approval.
All IVAs must be supervised by an insolvency practitioner. Pending the approval of the arrangement, the insolvency practitioner will act as the nominee and will usually become the supervisor once the arrangement comes into effect. If your IVA is approved, you will make scheduled payments to the insolvency practitioner who will then divide the money between all of your creditors (and pay his or her fees).
Other Debt Management Procedures
Individuals with modest levels of consumer debt may also apply for a debt relief order (DRO) or a County Court administration order (CCAO).
Our lawyers are available 24/7 to assist you and provide legal advice. Contact London 020 3753 5352 or Manchester 0161 834 7284. Alternatively you can email firstname.lastname@example.org