Corporate insolvency: a quick guide
This short essay discusses the differences and similarities between corporate bankruptcy in England and Wales. Why not read on more to learn about the key differences.
When is a company insolvent?
A firm is deemed to be insolvent if its assets are insufficient to pay off its liabilities and obligations.
- A company might be unable to pay its debts as they come due if it is insolvent (cash-flow insolvency). Has liabilities greater than assets (balance-sheet insolvency).
What are the risks for directors of an insolvent company?
Directors of insolvent firms are not required to act in the best interests of their company’s shareholders. Directors who are concerned about their firm’s financial health must think carefully about what they’re doing and obtain expert counsel (see Checklist, Dos and don’ts for directors of a business on the verge of bankruptcy and Practice note, how do I give
If a firm becomes insolvent or is liquidated:
- If a company’s directors continue to operate after it has gone bankrupt, they can be sued in their personal capacity for creditors’ losses (wrongful trading).
- On the conduct of the directors and, if appropriate, in director disqualification proceedings, the administrator or liquidator submits to the Insolvency Service, an outpost of the Department for Business, Energy and Industrial Strategy (BEIS), which is a government department.
Director’s face greater liability for company failures because of these factors. In addition to any personal liability, the directors may be held responsible for any breaches of duty to the firm.
What are the options in respect of an insolvent company?
In administration, a firm is insulated from creditors attempting to collect their loans, and an administrator (a qualified insolvency expert) takes over the management of the business’s operations and affairs. The administrator runs the firm with the goal of restructuring or selling some or all of its assets. For further information, see Practice Note, Administration.
In other circumstances, before the administrator is chosen, a contract to sell the firm’s business and assets are negotiated and completed as soon as appointment. This is known as a pre-packaged administration sale or pre-pack.
A company’s assets are put under the control of a liquidator, often known as a qualified insolvency professional (a competent bankruptcy practitioner), after it is declared bankrupt. In most circumstances, when a firm is placed into liquidation, it immediately stops trading. The liquidator will sell the business’s assets and distribute the proceeds to creditors.
Company voluntary arrangement (CVA), scheme of arrangement or restructuring plan
An arrangement between a firm and its creditors, known as a CVA, is an agreement in which the company compromises or negotiates for the discharge of its obligations. If most creditors approve the CVA, it will be binding on all creditors (except those with security over the business’s assets).
In certain situations, a scheme of arrangement or a Part 26A restructures plan may be considered rather than a CVA. Scheme of arrangement and Part 26A restructuring plans (often known as “reorganisation agreements”) are corporate negotiations that, if successfully completed, result in a court-approved deal between the firm and its creditors.
Part A1 moratorium
A company may take advantage of a moratorium procedure (also known as a Part A1 moratorium under the Insolvency Act 1986) to obtain breathing room while it searches for a solution or trades its financial problems away. Creditors are generally unable to do anything against the firm during the moratorium, and providers must keep providing items and services.
The charge-holder can appoint a receiver to sell the assets and pay the proceeds directly to him or her in satisfaction with the secured debt. A receiver may be appointed in what are now extremely rare cases over the company’s property and business generally, if the holder of a debenture containing both fixed and floating charges over (together) all or substantially all the assets of a firm,
Get help with liquidation
Irwin Insolvency has over 25 years’ experience in helping businesses throughout the UK deal with liquidations. They understand how difficult the liquidation process can be. Why not contact them and see what they can do for you today.