A Guide to Corporate Insolvency

A Guide to Corporate Insolvency

In this guide, we’ll explore what corporate insolvency means and what options may be available to you as a director facing financial challenges.

Directors worrying about the financial position of their company will need to think about all their options to help salvage their business. However, it’s important they take professional advice before considering further action. This will usually involve some kind of corporate or company insolvency service.

In this guide, we’ll explore what corporate insolvency means and what options may be available.

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What is corporate insolvency?

When a company or corporate is insolvent, it means the business is having difficulty keeping up with their credit repayments and invoices. Typically, this is more serious than some cash flow issues or occasionally paying an invoice late. It usually means that the business’s finances have reached such a state that serious changes or restructuring is necessary.

If your corporation or company is facing insolvency, you need to think about what the best course of action is. After all, what you decide can have serious consequences for your employees and their livelihoods.

What are your company insolvency  options?

Around 100 - 150 words introducing potential options when directors face corporate insolvency (the next section will list these in more detail).

Different options may be available depending on the individual’s circumstances. For example, in certain circumstances, it may be possible for an individual to reach corporate solvency through informal arrangements. On the other hand, there’s compulsory liquidation, which is entirely  creditor-led.

Different options may be available depending on the company’s circumstances. Below, we talk through eight options that could be appropriate for you.

Option  1: Informal Arrangements

It may be possible to negotiate an informal settlement with creditors, which will restore a company to solvency. This clearly depends on individual circumstances and creditors will need to be offered more than they could reasonably expect to receive from a formal procedure.

When your company is insolvent, it may be possible to negotiate an informal settlement with creditors. This, of course, will greatly depend on your circumstances. For this to work, your creditors will want to feel confident they’ll recuperate more than by going through a formal process.

Option 2: Fixed Charge or Law of Property Act Receivership

This appointment is made by a mortgagee who holds a fixed charge over an asset of the company.  The Receiver is appointed to realise a specific asset for the benefit of the charge holder to repay its debt. 

Option 3: Administrative Receivership

The holder of a floating charge over some or all of a company's assets created prior to 15 September 2003 may be able to appoint an Administrative Receiver should the company default under the terms of the debenture.

Since the enactment of the Enterprise Act 2002, an Administrative Receiver may only be appointed in certain prescribed circumstances.

Administrative Receivership is likely to be utilised to enable the company to continue trading in order to facilitate a going concern sale of its business and assets. The Administrative Receiver will attempt to realise the assets covered by the floating charge for the benefit of the creditor holding the charge.

An Administrative Receiver is a kind of company insolvency practitioner who is appointed to a business. Their role is to understand all assets properly and continue trading where the business is a going concern, distributing assets appropriately to the benefit of creditors.

Since the enactment of the Enterprise Act 2002, an Administrative Receiver may only be appointed in certain prescribed circumstances. It’s therefore important to seek the advice of a licensed corporate insolvency practitioner to see if you qualify.

Option 4: Administration

A company may be placed into Administration out of court by a qualifying floating charge holder or director. Other parties such as creditors or shareholders may seek to appoint an Administrator via the court.

This is designed to be a constructive procedure with the aim of achieving 1 of 3 objectives:

1. Rescuing the company as a going concern (not simply its business). If this is impossible;
2. Achieving a better result for the company's creditors than would be likely if the company were wound up. If this is not possible;
3. Realising property in order to make a distribution to one or more secured or preferential creditors.

A qualifying floating-charge holder can place a company into Administration, but other creditors or shareholders may seek to appoint an Administrator via the court. The aim is to achieve one of the following:

1. Rescuing the company as a viable business with resources to keep operating; or
2. Achieving a better result for the company's creditors than would be likely if the company closed;
3. Understanding assets fully to distribute to one or more creditors.

Option 5: Company Voluntary Arrangement (“CVA”)

This is a formal process that can only be obtained through an Insolvency Practitioner who will organise a payment schedule to pay creditors over a fixed period.

Under a CVA, a company can be re-organised to enable it to pay as much as it can to its creditors and continue to trade. The CVA must be approved by 75% or more of those creditors voting at the meeting of creditors.

CVA’s are a flexible, legally-binding tool that can provide protection from creditors as well as offering reassurance to creditors that some of the debt will be repaid.

When your company becomes insolvent, you might need to arrange a Company Voluntary Arrangement. This can only be implemented by a licensed corporate insolvency practitioner, who will create a payment schedule to pay creditors over a fixed time. It must be approved by at least 75% of voting creditors.

CVAs are a flexible, legally binding tool that can provide protection from creditors as well as offering reassurance to creditors that some of the debt will be repaid.

Option 6: Members' Voluntary Liquidation

A solvent liquidation that facilitates the closure or restructure of a company's business. Shareholders of a solvent company who choose this route will approve a resolution to voluntary wind up the company and appoint a Liquidator to realise the assets of the business.

It provides for all creditors to be paid in full (together with interest) within twelve months and for the distribution of surplus assets to its shareholders.

This is where shareholders of a solvent business voluntarily wind up the company and appoint a liquidator to decide how best to distribute assets. This corporate insolvency option should allow for all creditors to be paid in full within twelve months.

Option 7: Creditors' Voluntary Liquidation

This is appropriate when a company is insolvent and has no prospect of continuing to trade profitably in the future.

The company’s directors can choose to voluntarily bring the business to an end by approaching an Insolvency Practitioner to liquidate its assets.

This is similar to Members’ Voluntary Liquidation, except it applies to businesses that are no longer solvent. That means there’s usually no prospect of being able to continue and make a profit. A licensed corporate insolvency practitioner will need to be appointed to liquidate the company’s assets.

Option 8: Compulsory Liquidation

This is invariably a creditor driven process, which follows a winding-up order made by the court, usually on the petition of a creditor. It is a creditor's action of last resort in attempting to collect an outstanding debt.

The Liquidator has wide ranging powers in order to review the company’s affairs and its officers’ conduct which in turn may result in recovery of funds for the benefit of creditors.

This process will be driven by creditors as a last ditch effort to collect any money they’re owed. A court will order a company to close and a liquidator will be appointed to review the company’s affairs and its officers’ conduct, and see if funds can be recovered for creditors.

If you’re concerned with your business’s finances and are worried what to do next, our professional and licensed corporate insolvency practitioners are here to guide you. Speak with us today.

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