Corporate Insolvency

Corporate Insolvency

The signs that a company is insolvent are:

Liabilities exceed assets (balance sheet insolvency)
Debts cannot be paid when repayment is due (cash flow insolvency)
Choices
The choices available to an insolvent company are:

In-house Recovery Plan
Company Voluntary Arrangement (CVA)
Administration
Liquidation

Wrongful Trading

If a company is insolvent its directors are duty bound to behave responsibly to protect creditors and shareholders interests. If directors are judged to have behaved unreasonably they can become personally liable for company debts from the time it became insolvent. This usually involves continuing to trade while insolvent to the further disadvantage of creditors.
A recovery plan is the very best way to trade out of insolvency. If cash flow problems are truthfully judged as temporary then a recovery plan can be formulated. Recovery plan options are:

RECOVERY

Internal recovery plan
External recovery plan

Internal Recovery Plan

This would normally be the most favoured option for any company. The recovery plan is formulated and implemented totally in-house. The directors contact creditors informally to explain the situation and request new terms for repayment of debts. This must be linked to innovative financial measures to improve profitability such as new trading initiatives which are explained to the creditors. Hopefully the business will recover to everyone's advantage.
External Recovery Plan
This involves employing a company to provide specialist recovery services. The company acts as 'honest broker' assisting in the formulation of a recovery plan and overseeing its implementation. The use of a third party company in this way helps to provide specialist and expert advice as well as transparency to creditors, shareholders and employees alike.
Neither class of recovery plan involves formal legal procedures.
in liquidation or receivership.

Company Voluntary Arrangement

A CVA is a legal arrangement which allows a company in debt to continue trading. It is a very attractive rescue package that enables insolvent companies to avoid liquidation.

Write Off Debts

In a CVA the company and its creditors (including HM Revenue and Customs) agree to a phased repayment of debts over a defined period, usually 5 years. These repayments are made from future trading profits. Normally only an agreed fraction of debts will be repaid and interest and other charges will be frozen during the period of a CVA. Normally a CVA will be accompanied by a restructure within the company to improve the business. Once the CVA is completed all remaining unsecured debts are written off and the company continues to trade profitably. The characteristics of a CVA are:

Do a deal with your creditors
Recover
Continue trading

Appoint An Advisor

A company wishing to arrange a CVA needs to appoint an advisor (insolvency practitioner) to draw up the arrangement and oversee its implementation. This is where Beesley and Company can help. As Insolvency Practitioners we have extensive experience of compiling and administering voluntary arrangements.

Administration

Administration is a legal process that protects insolvent companies from agressive creditors until a way out of financial problems is found. When a company enters administration all legal actions against the company are stopped.
Aim
Administration has a declared aim. It is to protect the company while a plan is drawn up to rescue it, sell it or liquidate it.
Action
An Administrator, appointed by the courts, will determine the best way forward and then oversee its implementation. The best way forward may be:


Sell the company
Implement a recovery plan such as a CVA
Liquidation

Liquidation

Prior to liquidation it may be appropriate to sell the assets to a new or existing company that will continue trading.

Liquidation involves selling off all company assets to raise money to repay creditors and then closing the company down. It is the final option for an insolvent company that is not viable. Before liquidation is contemplated all recovery options should be considered. Liquidation does, however, draw a line under company misfortunes and the concerns of directors. Liquidation can be voluntary or compulsory.

Voluntary Liquidation:

Creditors Voluntary Liquidation (CVL) is initiated by the directors who, with shareholders, nominate an Insolvency Practitioner to wind up the insolvent company. Creditors formally make the appointment, hence the term CVL. The liquidator must be a licensed Insolvency Practitioner who will dispose of all company assets and share the proceeds with creditors in accordance with their adjudicated claims and priorities. The liquidator will also report on the conduct of the directors in relation to the demise of the company. This should show that the directors behaved responsibly and no wrongful trading took place.

Compulsory Liquidation:

Compulsory liquidation is initiated by a creditor, or government agency such as HM Revenue and Customs, who can demonstrate that all reasonable steps to recover an undisputed debt have failed (eg debt collector). A winding up petition is served and a liquidator is appointed by the courts. Either the official receiver or an IP will be appointed to act as liquidator. Even if the debt is paid at this stage the wind-up hearing will go ahead with attendant risk to the reputation of directors. Compulsory liquidation can be seriously damaging to directors and should be avoided if at all possible