Insolvency procedures, whether personal or corporate, can be a challenging and stressful experience for those involved. For businesses, it often begins with cash flow pressures, while individuals might find themselves unable to meet personal financial obligations.
Understanding the types of insolvency and the procedures available is crucial for making informed decisions. This article provides a comprehensive guide to both personal and corporate insolvency.
Corporate Insolvency
Corporate insolvency arises when a business is unable to meet its financial commitments, often due to cash flow shortages or excessive liabilities. There are two common tests for determining a company’s solvency or insolvency:
- Balance Sheet Test: where the value of a company’s assets is less than the value of its liabilities.
- Cash Flow Test: where a company cannot pay its debts as they fall due.
Insolvency Procedures for Businesses:
1. Administration
Administration is a rescue-focused procedure. The administration process provides a company with a breathing space, known as a moratorium, which will protect the company from creditor actions (both existing and future). A company will be placed into administration where it is believed there is a reasonable chance the business can be rescued or, if that is not possible, with a view to achieving a better return for the company’s creditors compared to liquidation. An administrator can be appointed using the out-of-court procedure by the company itself, its directors or a qualifying floating charge holder. Alternatively, an administrator can be appointed by one of the following parties making an application to the Court:
- the company;
- its directors;
- one or more of the company’s creditors; or
- a designated officer (defined under section 87A of the Magistrates’ Court Act 1980).
There are various occasions where a court application is required, including where a winding-up petition has been presented against the company but not yet disposed of or where an administrative receiver is in office.
2. Company Voluntary Arrangement (CVA)
A CVA is a procedure used to offer a solution to companies which are in distress. A CVA is a contractual arrangement made between a company and its creditors for repaying its debts in full, or in part. Terms may include reduced or delayed payments and a CVA allows a company to continue trading whilst addressing its debts. A CVA must be approved by 75% of creditors (by debt value).
3. Administrative Receivership
In this procedure, a floating charge holder appoints an administrative receiver to recover debts by selling the company’s assets. Since the Enterprise Act 2002, administrative receiverships have become less common.
4. Compulsory Liquidation
Compulsory liquidation is the process of winding up a company by the court. It is often used by creditors who are owed £750 or more, and is usually, but not always, preceded by a statutory demand. This process can also be used by the company itself or the company’s members. In the event a winding up order is made; a liquidator is appointed who has various duties and obligations under insolvency legislation and must investigate the reasons for the company’s failure.
5. Voluntary Liquidation
- Members’ Voluntary Liquidation: initiated through a resolution of the company’s members, when a solvent company decides to wind down operations and move towards the dissolution of the company
- Creditors’ Voluntary Liquidation: also initiated by the company’s members, at the request of the directors, to bring about the end of an insolvent company and seek creditor approval to appoint a liquidator.
Personal Insolvency
Personal insolvency occurs when an individual cannot meet their financial obligations and is unable to pay their debts as and when they fall due. Bankruptcy is the most well-known option; however, other procedures may be more suitable depending on the circumstances.
Options for Personal Insolvency Procedures:
1. Informal Arrangements
Debtors may seek to make direct agreements with creditors to repay debts over time. Although flexible, these arrangements are not legally binding, meaning creditors can still enforce their claims.
2. Debt Management Plan (DMP)
A DMP allows individuals to make manageable monthly payments towards their debts. These plans are unregulated and are often set up through debt management companies, which distribute payments to creditors on behalf of the debtor.
3. Individual Voluntary Arrangement (IVA)
An IVA is a legally binding, contractual agreement between a debtor and their creditors to pay off all or part of the debtor’s debts. IVAs are often proposed where a debtor is in financial difficulties and can follow the presentation of a bankruptcy petition, with the aim being the release of liabilities outside the context of bankruptcy. An IVA will bind a debtor’s creditors, including those who voted against it, as long as the requisite majority of votes in favour of the IVA were obtained (75% by value).
4. Debt Relief Order (DRO)
DROs are designed for individuals with little or no income and minimal assets and can be obtained by an application to the Official Receiver.
5. Bankruptcy
The bankruptcy process can be commenced by a creditor who is owed £5,000 or more, or a debtor can apply to declare themselves bankrupt where they cannot pay their debts as they fall due. If a bankruptcy order is made, the debtor’s assets will vest in a Trustee in Bankruptcy, who has to realise the assets for the benefit of the bankruptcy estate and to pay a dividend to creditors. Bankruptcy comes with various legal restrictions, including limitations on acting as a director of a company, or obtaining credit over £500.
Why Seek Expert Advice?
Insolvency can be overwhelming, but seeking professional advice early can make a significant difference. Whether you’re a business owner facing corporate insolvency or an individual struggling with personal debts, experts can help you identify the most appropriate solutions.
At Nelsons, our restructuring and insolvency specialists have extensive experience in corporate and personal insolvency and can provide confidential, tailored advice to guide you through the process or to assist creditors seeking to recover their debts.
This article is for information only and does not constitute legal/financial advice. Please contact us for advice tailored to your specific position. Some of the content presented on our website has been generated with the assistance of Artificial Intelligence (AI). We ensure that all AI-generated content meets our high standards for accuracy and relevance.
