What procedures does the Insolvency Act allow?

In the UK, insolvency is the term used for a business which is unable to service its debts as and when they fall due, bankruptcy only applies to individuals. There are a number of procedures that the Insolvency Act 1986 allows:

Company Voluntary Arrangement (CVA)

Under a CVA the directors or the Administrator (if the company has been placed into administration) make a proposal to creditors to repay some of the amount that is due to them, possibly over a period of time. The proposal, once agreed by creditors, is legally binding on them all and they cannot then try and enforce their debts. Once creditors approve the proposal the debts of the company are frozen. The CVA therefore gives directors the opportunity to continue to trade and use a proportion of profits to repay creditors a proportion of the amount that is owed to them (this is called the dividend). The CVA procedure is flexible and the directors could, for example, undertake to sell a property, a business division or indeed raise new funds with which to pay the dividend to creditors.

Creditors may agree to the proposals because they will receive more than if the company was placed into liquidation immediately.

A CVA can therefore be funded by, for example:

future profits
the sale of assets
the sale of the business or a part of it
by way of new funding.

A CVA can sometimes last for many years. The main benefit of a CVA is that the directors retain control over their company as long as they stick to the agreed proposal.

Administration

Administration protects the company from its creditors for a period of time (up to one year, and sometimes longer with the agreement of creditors or the Court) so that the administrator can try and save the business or maximise the value of its assets.

A licensed Insolvency Practitioner is appointed as Administrator of the company and takes over its management from the directors.

The Administrator’s role is to then develop a plan to rescue the business and pay off creditors.

Members’ Voluntary Liquidation (MVL)

Members’ Voluntary Liquidation can only occur when a company is still solvent and able to repay all creditors. MVL is a mechanism for winding up the affairs of a company where, for example, the directors no longer wish to continue with the business. Directors must swear a declaration that the company can meet all of its liabilities.

A liquidator is then appointed who will liquidate the assets of the company, use these funds to pay off all debts and share out the remainder amongst the company shareholders.

Creditors’ Voluntary Liquidation (CVL)

A CVL is the voluntary route to placing a company into liquidation. The directors resolve to place the company into liquidation and the shareholders pass a resolution to wind the company up.

A meeting with creditors is then arranged, where creditors can either accept the appointment of the Liquidator or vote to install another liquidator of their choice.

Directors will remain in their positions during this process but the liquidator will take overall control of the business. The liquidator will examine the reasons for the failure of the business, liquidate the assets of the company and use these funds to settle the claims of creditors.

Compulsory Liquidation

Compulsory Liquidation occurs when the Court grants an order for the company to be wound up following the petition from a creditor or sometimes the directors themselves. The Official Receiver (a civil servant who works for the Insolvency Service) will be appointed as the Liquidator. A creditor can, however, ask the Official Receiver to appoint a Licensed Insolvency Practitioner as liquidator and may do so because the creditor wishes his own liquidator to investigate the company's affairs.

The liquidator will sell the company’s assets and use these to meet the costs of the liquidation and to pay a dividend to the company’s creditors.

Gore and Company has extensive experience in dealing with all types of Insolvency procedure. If your company is in financial difficulties contact Gore and Company for a free initial consultation to discuss your options.

Please note that the above is provided for illustration purposes only and comprises a short view of extremely complex insolvency and other legislation. This is a complicated area and specific advice must be sought before undertaking any course of action or before refraining from any course of action. Gore and Company takes no responsibility for any loss incurred to or by any person who either acts or refrains from acting on the basis of the above or of any other item published on this website. The above note may not be reproduced without the prior written consent of Gore and Company.

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