Corporate insolvency solutions are designed to either wind-up a business or company, or rescue it from financial difficulty. As we explained in our Insolvency vs Liquidation vs Bankruptcy blog, businesses can be considered insolvent when there is enough evidence for one (or both) of the following reasons:
- Cash flow insolvency: your business does not have enough cash to pay debts and you have illiquid assets (assets which are hard to sell, and therefore cannot help you remedy the problem).
- Balance sheet insolvency: your company’s liabilities and debts are greater than its assets (liquid and illiquid).
Common causes of insolvency include unexpected cash flow issues, loss of contracts, legal expenses, and loss of customers themselves. The law relating to corporate insolvency in England and Wales is primarily found in the Insolvency Act 1986 and The Insolvency (England and Wales) Rules 2016.
But today we explain what happens after a business has been declared insolvent. Explore the different types of corporate insolvency solutions below.
Types of corporate insolvency solutions, summarised
There are several main categories of insolvency solutions. There are those that ultimately result in a company being dissolved:
- Compulsory liquidation (CWU)
- Creditors’ voluntary liquidation (CVL)
And those which provide potential for the rescue of the company or its business:
- Administration (ADM)
- Company Voluntary Arrangement (CVA)
In many insolvency cases, the insolvency practitioner has a responsibility to investigate the causes of company failure. Any issues identified during the investigation, such as misappropriation of funds or the sale or disposal of assets at less than their true value, must be reported to the Insolvency Service. This could lead to serious consequences such as disqualification from acting as a director or a requirement to repay any misappropriated funds.
The Official Receiver is the first civil servant who sees the case. If there’s a lot of assets or if it’s a very complicated case then they might not send it to the insolvency practitioner.
What is liquidation?
As we alluded to above, liquidation is a process which ultimately leads to a Company being dissolved from the Companies House Register. As part of the liquidation process, the business ceases to trade, is permanently closed and it has no ability to trade or employ staff.
Liquidation primarily exists to repay creditors by liquidating the company’s assets (if there are any).This involves the Insolvency Practitioner acting as Liquidator, selling them in exchange for cash which is later used to repay (as much as possible) the company’s debts owed.
There are three types of liquidation, the last of which does not require the company to be insolvent but is worth knowing.
Creditors voluntary liquidation (CVL)
In a Creditors Voluntary Liquidation (CVL) the company is insolvent and does not have the funds or assets to pay its liabilities or to continue trading. So, directors and shareholders take the decision to place the company into liquidation and hand control over to a licensed insolvency practitioner, who consequently acts as the Liquidator and winds up the company’s affairs.
This can happen when:
- The company has a diminishing order book
- The market for its goods or services has reduced or disappeared
- Its liabilities are substantial meaning that a CVA would not yield a viable return to creditors
- The directors no longer have the appetite to continue in business
- A creditor has threatened to wind the company up through the courts and the directors would rather control the proceedings themselves
- The company is insolvent and no longer viable
The appointed liquidator’s role is to realise the company’s assets and make a distribution to creditors if there are surplus funds, after the costs and expenses of the liquidation have been met.
Compulsory liquidation (CWU)
In Compulsory Liquidation (CWU), a winding up petition is issued by a creditor whom the company is unable to pay, which subsequently ends up in a ‘winding up hearing’ in court.
If the judge decides the company is unable to pay its debts, a winding up order is granted and an Official Receiver appointed to assess whether a liquidator is required. The Official Receiver is someone who liaises, directly or indirectly, with all parties affected by the insolvency. Directors must be interviewed by the Official Receiver to answer questions concerning the company’s failure.
The Official Receiver may then pass the liquidation to an insolvency practitioner to continue the winding up process, or they may deal with the liquidation themselves ‘in-house’.
Compulsory liquidation may be suitable when:
- The business is insolvent and no longer viable and/or
- The shareholders cannot agree to pass the resolutions to place the company into Creditors’ Voluntary Liquidation and/or
- A statutory demand for payment of an unpaid debt has been served on the company and remains unpaid after 21 days
Ultimately, the company’s assets are liquidated to realise the amount owed to creditors. The company and directors themselves can also petition the courts for a compulsory liquidation, but it is a less common scenario.
Members voluntary liquidation (MVL)
A Members Voluntary Liquidation (MVL) is a solution utilised when a company is still solvent but has come to the end of its useful life. This may happen if the owner wishes to retire or simply doesn’t want to run the company anymore. There needs to be enough value in the remaining assets to pay company debts and creditors in full plus statutory interest, with any remaining funds or assets distributed to the company’s shareholders. More on members voluntary liquidation.
What is administration?
An Administration (ADM) is where a licensed insolvency practitioner is appointed as Administrator of a company to manage its affairs, business and property. A company can continue trading whilst in administration but only in appropriate circumstances.
This type of insolvency solution may be suitable when some or all of the following apply:
- There is an immediate threat of a creditor winding up petition, a bailiff seizing the company’s assets or a landlord threatening to re-enter premises under Commercial Rent Arrears legislation
- The company is struggling to pay its debts as and when they fall due
- There is a valuable business and/or assets to protect and obtain value from
- There is an opportunity to rescue the company or at least save the business
This insolvency solution will only be recommended when there is an opportunity for rescue, for creditors to achieve a better result than if the company had been liquidated, or to facilitate a payment to the secured and/or preferential creditors. If none of these goals can be achieved, the company cannot be placed into administration.
The company, the directors, its creditors or a qualifying floating charge holder (usually a bank with a debenture over the company’s assets) can make the administration appointment. The commencement of the Administration process triggers a moratorium, which gives legal protection to the company from the threat of creditor actions.
Control of running the company passes from the directors to the Administrator. As in the case of Liquidation, the Administrator has a duty to investigate the causes of the company’s failure and issue a report on directors conduct to the Insolvency Service.
What is a Company Voluntary Arrangement?
A Company Voluntary Arrangement (CVA) is an insolvency procedure that allows a company to put forward a written proposal to agree with its creditors about how a company’s debts should be dealt with.
Unlike liquidation, a CVA can only be proposed by the company i.e. not creditors or shareholders. An insolvency practitioner, acting as the company’s Nominee, must then report to the court on whether the proposals should be put before the company’s creditors and shareholders to decide whether the CVA should progress.
A decision process, such as a virtual meeting, is then held for creditors to consider if they will vote in favour of the CVA. The CVA is approved if more than 75% by value of the company’s creditors vote to approve the proposals. Creditors also have the opportunity suggest amendments in the form of modifications to the proposals as a condition of approval. Once approved, the insolvency practitioner then acts as the CVA Supervisor to ensure the company follows the CVA proposal terms.
In a CVA, the directors remain in control and the company’s liabilities to the creditors are cleared once the arrangement has finished. The company can continue to trade under supervision until the agreement has come to an end, and without supervision thereafter.
Licensed insolvency practitioners in Manchester
At Mercury Corporate Recovery Solutions, we always advise the best route for you. When you or your clients are experiencing financial difficulties, you need experienced professionals who listen and take the time to understand the nuances of your situation.
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