Insolvency Q&A part one: general insolvency

Insolvency Q&A part one: general insolvency

Welcome to part one of our five part blog covering the most frequently asked questions around insolvency and liquidation.

Over the next five months we’ll publish a new insolvency blog each week covering one of the following topics: general insolvency, business owners and company directors, individual and sole traders, employees, and creditors. 

Part one will cover the most frequently asked questions around general insolvency.

For further advice about any of the topics covered in our insolvency blogs or regarding a specific scenario, please contact our insolvency & recovery specialists on 0330 024 0888 or enquiry@larking-gowen.co.uk. All initial discussions are confidential, free of charge and without obligation.

1. 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.

2. 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.

Larking Gowen has two licensed insolvency practitioners, who are authorised to act by the Institute of Chartered Accountants in England and Wales.

3. 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.

4. 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.

5. 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.

6. 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.

7. 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.

8. 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.

9. 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.

10. 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.

11. 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.

12. 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.

Please contact one of our insolvency practitioners if you’d like to discuss striking off your company.

Need help?

To find out more, call 0330 024 0888 or email enquiry@larking-gowen.co.uk.

Lee Green