What is insolvency?
In general, this is the moment in time that a business or individual passes the point that there is a reasonable prospect that all liabilities can be met as they fall due or all creditors will be paid in full.
Am I insolvent?
As explained above, the definition of insolvency will depend on the circumstances of the business or personal finances of the individual. Some indicative features are:
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A statutory demand, which has been served by a creditor who is indebted for more than £750, remains unpaid for 21 days. |
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Execution or other process issued on a judgement, decree or order of any court in favour of a creditor which is returned unsatisfied in whole or in part. |
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It is proved to the satisfaction of the court that you are unable to pay your debts as they fall due. |
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Monthly payments due to creditors are unlikely to be met |
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Expenses are being incurred and the likelihood or settlement is a concern, of particularly concern is the build up of Paye and Vat liabilities. |
The above are very simplistic explanations of what are very complex and involved issues. It would be very easy for an individual or for the director of an insolvent company to commit criminal offences, even unwittingly, so proper professional advice should always be sought. The consequences for a director not behaving properly in an insolvent situation can range from being disqualified from being a director for a period of time to making himself personally liable for the company's debts - or even facing criminal proceedings.
The answer: seek professional advice early. At ThorntonRones, all initial advice is free.
Company insolvency options
Administration Order
An administrator may be appointed by the court, certain specified creditors or the company itself. An administration order is a Court Order placing a company that is, or is likely to become, insolvent under the control of an administrator. The purpose of the order is to have three objectives in mind. Firstly, that of rescuing the company. If that isn't practicable, then secondly, in order to achieve a better result for the company's creditors as a whole than would be achieved by a winding up. Thirdly, if the first or second options are not practicable, to do his or her best for the secured and preferential creditors without unnecessarily harming the interests of the creditors of the company as a whole. An administrator runs the company and calls a creditors' meeting to decide what to do next.
Administrative Receivership
This is when a licensed insolvency practitioner takes control of the company. The administrative receiver (sometimes abbreviated to receiver) decides whether to continue the business and attempt to achieve a going concern sale or shut it down. Only the holder of a debenture can appoint, eg a bank. The receiver will realise the assets, specified in the debenture under which he was appointed, and will account to the debenture holder and preferential creditors for these funds after deducting his fees. Any balance of funds is returned to the company.
Directors can also ask for a receiver to be appointed, for instance to avoid the risk of wrongful trading. Administrative receivership is only available for limited companies, and not normal partnerships. The receiver can carry on the company's business and sell the business and other assets comprised in the charge to repay the secured and preferential creditors.
Law of Property Act Receivership (LPA)
An LPA receiver is appointed by a lender who has a fixed charge over the property under the statutory power given in section 109 Law of Property Act 1925. The powers of the LPA receiver are as follows:
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To demand and recover rent |
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To give receipts for income |
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To insure any property against loss or damage. |
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To grant a lease over the property at the best reasonably obtained rent. |
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To accept a surrender of a lease in order to grant a new lease. |
In a well-drafted mortgage the above powers are extended and would allow the receiver to take control of the property and act as he considers fit with the consent of the mortgagee.
Fixed-Charge Receiver
A fixed charge receiver is appointed by a lender who has a fixed charge over certain assets of the company and has the power to appoint an agent to collect such assets on his behalf.
Company Voluntary Arrangement (CVA)
A voluntary arrangement for a company is a procedure whereby a company reaches an agreement with its creditors as a whole. There is limited involvement by the Court and the scheme is under the control of a supervisor. A company voluntary arrangement is used to rescue companies which are insolvent yet have an underlying business that would be profitable in the future without having old debts holding it back.
A proposal is drawn up by the directors or if the company is in liquidation or administration the liquidator or administrator. The proposal must name an Insolvency Practitioner who will act as nominee and will call meetings of the members and creditors. The nominee also reports to the court on whether in his opinion a meeting of members and creditors should be called to enable them to consider the proposal, and whether the proposal has a reasonable prospect of being approved and implemented.
The proposal takes effect and is binding on all creditors.
If needed, in advance of distributing a proposal, a court application can be made for a moratorium whereby it has a 28 day period of respite from its creditors during which proposals have to be made and put to creditors.
The sort of proposal put will generally include an agreement to pay so much in the £ to creditors over a specified period, usually up to 5 years, whilst paying all new debt as it falls due.
Liquidation (Winding-Up)
Applies to companies or partnerships. In general liquidation has two main purposes:
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The realisation and distribution of the assets and usually the closing down of the business. |
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To investigate the directors' conduct, and to report to the DTI . |
There are 2 basic types of liquidation - compulsory and creditors':
Compulsory Liquidation
The placing of a company into liquidation as a result of an application to the court, usually by a creditor. The Official Receiver is always the initial liquidator and conducts the investigation of the directors' conduct.
Voluntary liquidation
A method of liquidation not involving the courts or the Official Receiver. There are 2 types of voluntary liquidation:
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Members' voluntary liquidation (MVL) for solvent companies – where all creditors will be paid in full. No investigation of the directors is usually required as all parties have been paid in full. |
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Creditors' voluntary liquidation (CVL) for insolvent companies – It is commenced by resolution of the shareholders, but is under the effective control of creditors, who can choose the liquidator. |
Individual Voluntary Arrangement (IVA)
A Voluntary Arrangement is a proposal to creditors to pay off a proportion of the debts that are owed to them, they usually last up to 5 years. The concept of a Voluntary Arrangement is that creditors would receive a more beneficial payment, than would be likely in the event that the individual becomes bankrupt. In order for a Voluntary Arrangement to become binding, it must be accepted by 75% (in value) of the creditors. It is a flexible procedure that creditors can accept, amend or reject.
A proposal is drafted by the debtor, in practice ThorntonRones will draft it, setting out the debtors circumstances, assets and liabilities, and the manner in which it is proposed that the creditors are dealt with. When the proposal is complete an application for an interim order will be made if needed but is no longer necessary in all cases, the interim order prohibits the commencement or continuation of any legal process against the debtor or his estate until the nominee considers the proposal to be both realistic and workable.
A vote is held to decide on whether or not to accept the proposal. 75% in value of the creditors who are present or represented must vote for the proposal for it to be accepted.
The benefits of an Individual Voluntary Arrangement
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Avoids the stigma of bankruptcy. |
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You avoid being disqualified from acting as a director. |
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Certain employments require the debtor to be financially "responsible" and certain professions consider that bankruptcy automatically disbars the individual from acting as a qualified person of that profession. |
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Creditors receive a greater return than on bankruptcy |
Administration Order
If the debts of an Individual are less than £5,000, an application can be made to the local county court for an Administration Order. The applicant must compile a statement of means and a list of creditors showing the amounts outstanding. The applicant is required to sign and swear or affirm a declaration to the effect that the application is a true record of their indebtedness. The court will assess the application and will then propose an order that the applicant pays the debts in full or a percentage of the debt, by monthly instalments. Bankruptcy
Bankruptcy is a serious situation and should never be considered lightly. There are generally two forms of bankruptcy, a debtor's petition where you petition the Court for your own bankruptcy or a creditors petition where a creditor applies to the court to make you bankrupt. In order to be adjudged bankrupt you must be deemed insolvent (unable to pay your bills, as and when they fall due). The limit for bankruptcy is surprisingly low, a creditor may petition for your bankruptcy if the sum that you owe is £750 or more.
The bankruptcy proceeding has three aims:
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To free the individual from the pressures of creditors (people to whom they owe money) to enable him or her to make a fresh start. |
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To ensure that all assets (such as property and investments) are distributed fairly among the creditors. |
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The debtors affairs are investigated to assess any culpability |
The assets of the bankrupt individual fall under the control of a trustee. This will be either the Official Receiver (a civil servant and officer of the court), or a licensed insolvency practitioner. Whoever is appointed becomes responsible for uncovering as much as possible about the debtor's assets and liabilities and then maximising returns for the creditors from the assets available, within certain guidelines. Once a bankruptcy order has been made against you, your creditors can no longer pursue you for payment. Payment becomes the responsibility of the trustee
Deed of arrangement
A method for an individual (not a company) to come to terms with creditors outside formal bankruptcy. The procedure is governed by the Deeds of Arrangement Act 1914 and is now almost completely replaced by voluntary arrangements.
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