Meaby & Co – Solicitors Specialising in all areas of Corporate Insolvency
What is corporate insolvency?
Under English law a company is considered to be insolvent if it is unable to pay its debts. There are two tests for corporate insolvency:
- the cash-flow test: is the company currently, or will it in the future, be unable to pay its debts as and when they fall due for payment?
- the balance sheet test: is the value of the company’s assets less than the amount of its liabilities, taking into account as-yet uncertain and future liabilities?
What are the consequences of a company’s insolvency?
Depending on the facts of a given case, the following consequences of corporate insolvency may apply:
Increased risk of personal claims and directors’ disqualification. The directors of an insolvent company have a duty to put the interests of creditors ahead of all other interests. If they continue to trade beyond the point when insolvent liquidation becomes unavoidable they risk serious personal and professional consequences.
Heightened risk of formal insolvency procedure
A winding-up petition may be issued against the company by a creditor who has served a statutory demand for payment. This may result in the company being placed into compulsory liquidation
Any disposal of assets will be void once a winding-up petition has been presented. A company that wishes to sell goods or make payments for supplies while a winding-up petition is in progress, must obtain authorisation from the court first.
Default under banking facilities. Insolvency and the instigation of a formal insolvency procedure may be considered an event of default under any banking facilities held by the company. Default will entitle the lender to take steps to enforce any security it holds
Withdrawal of support from suppliers and customers. Insolvency may also be a trigger event, entitling suppliers and customers to take protective measures under contracts with the company. This can include termination of contracts and other enforcement measures
Transactions can be reviewed and reversed. If an insolvent company is subsequently placed into liquidation or administration, any transactions the company entered into for a period of up to two years before the insolvency procedure began can be reviewed on application by the appointed insolvency practitioner. For further details please contact us, our details are below.
If a company is insolvent what happens next?
There a a number of things that may happen and we will guide you through the process.
- Insolvency – A company can be placed into a formal insolvency procedure by its directors, shareholders, creditors or the court. How it is done will depend on the facts of each case and the procedure involved.
- Administration – This is a collective corporate rescue procedure run for the benefit of all creditors, under which the company’s assets are protected by virtue of a statutory ‘moratorium’, or stoppage, of any forms of creditor action.
- Administrative receivership – This is a process under which the holder of a floating charge against the company which pre-dates 15 September 2003 appoints a receiver-manager to sell the company’s assets for maximum value in order to pay off its secured debt. This procedure has been largely superseded by administration as a result of changes in the law.
- Company Voluntary Arrangement (CVA) – A binding form of agreement between a company and its creditors which is legally regulated. Under a CVA, creditors often agree to a reduced or rescheduled debt arrangement which will allow the company to survive.
- Scheme of arrangement – This is a compromise or arrangement between a company and its creditors or members. It is similar to a CVA, although it must be approved by a court. The process is more complicated than a CVA, and will usually only be used for large companies and those with a significant number of classes of creditor or shareholder.
- Liquidation – This is the collective process by which a company is ended by converting all of its assets into their cash value and distributing them to shareholders if the company is solvent or creditors if the company is insolvent. The liquidator must also examine the directors’ conduct, and take action if appropriate.
Who gets paid what?
When a company is placed into administration or liquidation, creditors are repaid in the following descending order of priority depending on the amount of cash available:
- secured creditors’ claims (fixed charge realisations);
- expenses relating to the administration or liquidation;
- Insolvency Practitioners’ fees;
- preferential creditors’ claims, including employee claims;
- prescribed part (see below);
- secured creditors (floating charge realisations);
- unsecured creditors’ claims – usually distributed by a liquidator;
- shareholders – very unusual, otherwise the company would not be insolvent.
The ‘prescribed part’ included above is an amount which must be set aside by the administrator or liquidator for the benefit of unsecured creditors. It is calculated as a proportion of the amount of assets which are subject to any floating charge created after 15 September 2003. The size of the fund will depend on the value of the assets, but can be up to a maximum of £600,000.
Meaby & Co Specialist insolvency lawyers
Our team is dedicated to providing expert advice and support to directors, creditors and bankrupts. The lawyers are well placed to assist you and your business in all aspects of bankruptcy, insolvency and liquidation. We work very closely with the litigation team to ensure that you get the best advice possible and specific to you and the needs of your company.
We offer expert advice on:
- Individual bankruptcy
- Asset tracing and recovery
- Director’s disqualification proceedings
- LPA Receiverships
- Company voluntary arrangements
- Individual voluntary arrangements
- Licensing and disciplinary work
- Business restructuring
- Debt management
For further information about how we can assist you please contact us by telephone on 0207 703 5034 or by completing the form below.