What are insolvency proceedings?
Insolvency proceedings are formal steps that are taken to deal with company debts. Not all types of insolvency proceedings are the same. Different measures will be considered depending on the type of company and the kind of debts they have. Insolvency may be dealt with through:
-
voluntary agreements
-
receivership
-
administration
-
liquidation
Who supervises insolvency proceedings?
Authorised insolvency practitioners oversee insolvency proceedings. They include:
-
liquidators - an authorised insolvency practitioner or official receiver who runs liquidation processes
-
administrative receivers - an appointed insolvency practicioner who takes control of company assets for the benefit of secured creditors who have the right to make the appointment
-
administrators - an insolvency practicioner who takes control of a company and all its assets while in administration
-
supervisors - the individual responsible for ensuring that a company voluntary arrangement is implemented according to its terms
Company voluntary arrangements (CVA)
A CVA is when a company makes a voluntary agreement with creditors to settle outstanding debts. The court must approve this arrangement. In many cases, a CVA will be proposed by the directors of the company, but an administrator or liquidator can also do this. The hope is often that, by making voluntary arrangements, a company can avoid going into administration or liquidation. Meetings are held with creditors and members to get approval for the CVA. Creditors who are not happy with the proposed CVA then have 28 days to challenge it.
Administration
Administration is when someone is appointed to manage a company's affairs for the benefit of creditors. This person is called ‘the administrator'. The aim is to save the company and help creditors recover the money they are owed, which would be less likely if the company was wound up (eg by achieving a better price for the company’s assets). Those who can appoint an administrator include:
-
a court order
-
the holder of a floating charge – a particular type of creditor
-
the company itself
-
the company directors
-
a company’s liquidator
Within 8 weeks, the administrator must make proposals about how the company can be turned around or, if this is not possible, explain why.
Receivership
Receivership is overseen by ‘the receiver' who can be appointed under the Law of Property Act 1925. This person is appointed by the holder of a floating charge – someone who has made a particular type of loan to the company secured against its assets. The receiver has the power to sell the assets or to take other appropriate steps to repay the holder of the floating charge.
Note that there are different kinds of receivers and their powers vary according to the terms of their appointment.
Liquidation
Liquidation is when a company is wound up. The person appointed to carry this out is ‘the liquidator'. There are two types of liquidation: voluntary liquidation and compulsory liquidation.
Voluntary liquidation
This can happen in two ways:
-
members' voluntary liquidation (MVL) – the directors have declared that the company is solvent
-
creditors' voluntary liquidation (CVL) – the directors have not made a declaration that the company is solvent
MVL happens when the directors have looked into the company's finances and declared that they believe it can pay off its debts in the next 12 months.
CVL happens when a company cannot pay its debts.
An MVL can become a CVL if the liquidator (ie the party appointed to wind up the company’s affairs) decides that the company won’t be able to pay its debts in full in the period stated in the directors’ declaration of solvency. Where this is the case, the liquidator must call a meeting of the creditors which must be held within 28 days. The liquidation becomes a CVL from the date of the meeting.
Compulsory liquidation
This is when a company is wound up by order of the court. This order can be made by the Court of Session or Sheriff Court. An order might be made after a creditor applies to the court because the company cannot pay its debts.
There are a number of situations in which a company is deemed not able to pay its debt company, including if:
-
a creditor is owed more than £750
-
a creditor presents a written demand in the prescribed form (known as a ‘statutory demand to the company’)
-
the company fails to pay, secure or agree a settlement of the debt to the creditor’s reasonable satisfaction
For more information, read the Government’s guidance and Ask a lawyer if you have any questions. If you want to find out if a business is insolvent, you can search the Insolvency Register.
