Insolvency procedures
This article is based on UK law.
The following is a brief summary of insolvency procedures.
Administration
Administration will have one of three purposes. These, in order
of desirability, are:
- to rescue the company as a going concern – as opposed to
selling its business and leaving a “shell”;
- to achieve a better result for the creditors as a whole than if
the company were wound up;
- to sell the business or its assets in order to pay secured
and/or preferential creditors (e.g. employees owed wages/holiday
pay).
Administrators can only opt for the second purpose if they think
that the first is not likely to be achieved or is not in the best
interests of the creditors as a whole. They may not seek to achieve
the third (fallback) purpose unless they think neither the primary
nor the secondary purpose is likely to be achieved and no
unnecessary harm will be caused to the interests of creditors as a
whole.
The advantages of an administration order are that, while it is
in force:
- a company cannot be wound up;
- no legal proceedings can be taken against a company;
- a receiver cannot be appointed and no other steps can be taken
to enforce any security;
unless, in each case, the administrator consents or the court
gives leave.
Once an administrator has been appointed they will take over the
management of a company. This will relieve the directors from
taking the critical day to day decisions and therefore minimise any
risks of liability from that point on.
There are now three methods of appointing an administrator.
These are explained below.
Appointment by the court
A company, its directors or one or more creditors can apply to
the court for the appointment of an administrator. The court may
appoint an administrator only if it is satisfied that a company is,
or is likely to become, unable to pay its debts and that the
administration order is reasonably likely to achieve one of the
three potential purposes explained above.
Appointment by the holder of a qualifying floating charge
(QFC)
A QFC is a floating charge over the whole or most of a company’s
property and is created by a document that states that paragraph 14
of Schedule B1 to the Insolvency Act 1986 applies – or, more
specifically, that the holder of the floating charge may appoint an
administrator or an administrative receiver (if the floating charge
was created before September 15, 2003).
Appointment by the company or its directors
A company or its directors can appoint an administrator without
a court order – i.e. make an “out of court” appointment. They will,
however, be unable to do so if within the previous 12 months any of
the following applied:
- the company had been in administration but that administration
had come to an end at the behest of the company or its
directors;
- a voluntary arrangement had ended prematurely;
- a moratorium (obtained under schedule A1 of the Insolvency Act
1986) had ended without a voluntary arrangement being
approved.
Company Voluntary Arrangements (CVAs)
A CVA is an arrangement whereby the company continues to trade
having reached an agreement with its creditors in satisfaction of
its pre-existing debts, usually for a percentage of their face
value. It can be used in cases where a liquidator or an
administrator has already been appointed. The directors propose the
arrangement and put it before unsecured creditors for approval.
Copies of the agreed arrangement are filed at court.
The procedure to put a CVA in place, and the implementation of a
CVA, must be supervised by an accountant qualified to act in
insolvency matters – i.e. an insolvency practitioner.
A CVA is not necessarily a “once and for all” solution. A
creditor may subsequently apply to a court on the grounds that
there is significant irregularity with the CVA or that their
interests are being prejudiced.
Until a CVA takes effect, a company will be unable to prevent
creditors from enforcing their rights unless additional protection
is sought from the court.
Voluntary winding-up
There are two types of voluntary winding-up. Both have the same
result: bringing the life of a company to an end.
- A members’ voluntary winding-up depends on a declaration of
solvency by directors. The directors swear that they have made a
full inquiry into the company’s affairs and have concluded that it
will be able to pay all its debts, together with interest, within
12 months of the declaration. The company, at a general meeting,
then passes a special resolution to wind the company up and
appoints an insolvency practitioner as liquidator.
- A creditors’ voluntary winding-up is begun by the shareholders,
who pass a resolution saying that the company cannot by reason of
its liabilities continue its business and that it is advisable to
wind it up. Subsequently, the creditors’ wishes regarding the
appointment of the liquidator and the conduct of the winding-up
generally override the shareholders’ wishes.
Compulsory winding-up
A compulsory winding-up can be started without the involvement
of a company’s shareholders. A petition is filed at court, and at a
hearing some weeks later the court decides whether to make a
winding-up order. If it does, the company is then in liquidation.
The petition is usually filed by creditors.
Receivership
A receiver may be appointed by the holder of a fixed or floating
charge granted by a company. Typically, a company will be served
with a demand for repayment of monies due, and this will be
followed by an appointment just hours later. Alternatively, a
company may invite a charge-holder to appoint a receiver.
The receiver’s task is to recover sums due to the secured lender
or to realise the lender’s security.
Historically, an administrative receiver has been appointed by
the holder of a floating charge covering the whole, or
substantially the whole, of the company’s property. Receivers, by
contrast, have been responsible solely for assets subject to a
fixed charge.
Administrative receivership, however, is dying out: the
provisions of the Enterprise Act 2002 effectively abolished it for
charges created after September 15, 2003.
