UK Insolvency Advice - Business Bankruptcy
A Guide to UK Insolvancy law concerning Business Bankruptcy.
article keywords: Business, Bankruptcy, UK, Bankruptsy, Bankrupcy, advice, insolvancy, insolvency
What happens to a business if it becomes insolvent ?
Insolvency law (chiefly the Insolvency Act 1989 ["the Act"]) governs how companies go out of business or recover from crippling debt.
An insolvent company, ("the debtor"), might use either an Administration Order or a Company Voluntary Arrangement ("CVA") to "reorganise" its business and try to become profitable again. Management continues to run the day-to-day business operations in the case of a CVA and an Administrator appointed by the Court will run a company in the case of an Administration Order. If a company goes into liquidation either voluntarily or is formally wound up by the Court, the company stops all operations and goes completely out of business. A liquidator may be appointed to "liquidate" (sell) the company's assets and the money is used to pay off the debt, which may include debts to creditors and investors. Alternatively and finally the debtor may have an Administrative Receiver ("a Receiver") appointed under a floating charge
Who gets paid first in the case of a company in liquidation ?
The order in which payments are made is fixed by statute. The general rule is that the creditors are paid in the following priority:-
- 1) Secured creditors holding fixed charges such as a bank lending money backed by a mortgage on land and buildings (and sometimes fixed plant) typically bargained for taking less risk. Assets of the company usually back the credit that they extend. They know they should get paid very early on the list if the company is liquidated. They will only receive payment to the extent of the value of the asset that is subject to the charge. They will have to prove as unsecured creditors for the excess if there is a shortfall.
- 2) Preferential creditors. These are creditors particularly government/crown departments who are statutorily preferred in the order of payment.
- 3) Floating charge holders. These differ from (i) above (fixed charge holders) in that fixed charges relate to specific assets such as land/buildings/fixed plant and machinery. Fixed charges only relate to specific named assets. Floating charges "crystallise" on assets which are held by companies from time to time. They are typically taken by banks and other lending institutions in conjunction with a fixed charge as outline at (i) above.
- 4) General creditors, such as suppliers of goods and services, and other lenders have a higher priority for recovering their losses than shareholders.
Shareholders own the company, and take greater risk. They could make more money if the company does well, but they could lose money if the company does poorly. The owners are last in line to be repaid if the company fails. Insolvency laws determine the order of payment.
What are the advantages of CVA or administration over receivership or winding up ?
A company may seek a CVA or an Administration Order because in the case of a CVA only they can still run their business and better control the process for rehabilitating the company's faltering business. Sometimes the company successfully works out a plan to return to profitability; sometimes in the end, it liquidates. In Administration there is a reorganisation. A company may keep doing business. It may return to profitability and even be returned to the control of the shareholders and directors.
When a Receiver is appointed pursuant to the provisions of a floating charge, the assets subject to a floating charge will be liquidated and the chargee will take those funds insofar as they repay the debt. Any excess will be returned to the company. Quite often though, this results in the company eventually being wound up.
In the case of a winding up, the company is legally put to rest. It ceases all activities and is rarely resurrected.
How does administration work ?
The Court will appoint an Administrator who is a licensed insolvency practitioner ("an IP" to represent the interests of creditors and shareholders in working with the company to develop a plan of reorganisation to get out of debt. A proposal is made to the creditors by the company.
The proposal is usually a plan developed by the company in conjunction with the IP in order to achieve one of the four aims for which an Administration Order can be made by the Court. The proposal must be presented to a meeting of creditors who may vote upon the proposal. The size of a creditor's vote is directly proportional to the amount of the debt. A simple majority is all that is needed to accept the proposals. In addition, the creditors can also amend the proposal and again a simple majority is all that is required. The Administrator can also amend the proposal although this will require ratification by the creditors. Again a simple majority must be obtained.
A Creditors' Committee is also formed, although the purpose of this is merely to oversee the administration and the role of the Creditors' Committee is largely advisory.
The plan must be accepted by the creditors and confirmed by the Court. However, even if creditors or shareholders vote to reject the plan, the Court can disregard the vote and make any Order that it sees fit to make.
The purposes for which an Administration Order can be granted must be one of the following:-
a) The survival of the company;
b) The approval of a CVA;
c) The sanctioning of compromise between the company and third parties;
d) The more advantageous realisation of a company's assets than would be achieved on a winding up.
Who develops the reorganisation plan for the company ?
Committees of creditors typically negotiate a plan call a Proposal with the company to relieve the company from repaying part of its debt so that the company can try to get back on its feet. This will usually be drafted by an IP.
After the creditors work with the company and the Administrator to develop a plan, the Court may order that the plan can be implemented. This takes a few months or a few years.
What are the Tax Implications ?
Contact your accountant or the Internal Revenue ("the IR") for information about how to report worthless securities as a loss on your income tax return. If you don't know whether your shares have value, and you can't find a share price in the newspaper, ask your broker or the company for information.
What is the affect of an Administration order ?
The effect of applying for an Administration Order is to freeze proceedings by creditors of the company. By way of example only, if a creditor of the company had commenced winding up proceedings against the company, then those proceedings cannot continue until the Administration Order has ceased to have effect or has been discharged.
Upon the making of an Administration Order and its approval by the creditors, all proceedings against the company cease. There are exceptions to this rule however, and these are "self help methods" which are typically old common law remedies for certain types of creditors.
What is a Company Voluntary Arrangement ?
A Company Voluntary Arrangement (CVA) is an arrangement between the company and its creditors.
The terms of the CVA are again known as the "proposal". The proposal contains details which will typically be drafted by an IP on behalf of the company for the consideration of the creditors.
Creditors will be informed in advance by the IP of a Creditors' meeting.
The Creditors will be able to vote at this meeting in accordance with the value of their debt.
A 75% majority will be required. The 75% majority relates to votes in favour of the proposal by creditors representing 75% of the value of the company's liabilities.
A percentage of creditors' votes required at all times relates to the body of creditors who are entitled to vote and who have exercised their entitlement.
What is the effect of a CVA ?
If approved, it binds all creditors who are sent notice of the meeting of creditors and who are all entitled to vote whether or not they actually decided to vote or attend the meeting. This means that after the approval of the CVA¸ those creditors will under normal circumstances, be unable to take any alternative action to recover their debt in full.
Even if a creditor votes against the proposal and nevertheless the proposal is approved by a majority of 75% of creditors by value, then the dissenting creditor will be bound by the terms of the CVA.
The IP will send to all creditors notice of the meeting of creditors together with a copy of the proposal for their consideration.
Typically, the proposal will deal with the various different types of creditors in different manners. Secured creditors cannot have their security overreached by the CVA without their authority.
Further creditors will be paid in accordance with the priority as set out above.
What is administrative receivership ?
Administrative Receivership ("Receivership") is a process under which the charge holder holds security by way of a Floating Charge, and appoints an IP known as an Administrative Receiver ("a Receiver") to realise the assets which are subject to a Floating Charge. Typically this will be a bank who holds the Floating Charge by way of security over assets which due to their nature e.g. they are perishables cannot be properly made subject of a fixed charge.
The Receiver will actually take control of the company and sell the assets which are the subject of the Floating Charge and apportion those funds realised firstly to the discharge of the floating charge holders' debt.
If there are any funds left over these are first appropriated to the costs of the Receiver and then returned to the company.
At the end of the Receivership, there are a number of routes which can be taken as follows:-
(a) The company can be returned to the directors and shareholders;
(b) The company can go into administration;
(c) The company can be wound up;
(d) The company can go into a CVA.
What is winding up ?
Some companies are so far in debt that they can't continue their business operations. They are likely to "liquidate". Their assets are sold for cash by a court appointed liquidator who is an IP. Administrative and legal expenses are paid first, and the remainder goes to creditors.
Secured creditors will have their collateral returned to them. If the charged asset does not realise sufficient funds to repay them in full, they will be grouped with other unsecured creditors for the rest of their claim. Unsecured creditors will be notified of the liquidation and should file a claim in case there is money left for them to receive a payment. The order of priority of creditors is the same as set out above in respect of Administration Orders.
Shareholders generally don't receive anything in return for their investment. But, in the unlikely event that creditors are paid in full, shareholders will be notified and given an opportunity to file claims for anything left over.
If a company goes into liquidation, do shares have any value ?
Usually, but not always, the shares are worthless. If someone approaches you with an offer to buy it from you, that may be a tip off that yours is one of the unusual circumstances.
Can't find what you're looking for here ? Try:-Bankruptcy Alternatives
Debts over £15K ? An IVA maybe the solution for you. upto 70% of all Debts written off.
Bad Credit Loans
Specialists in helping UK residents who have been refused a loan elsewhere.
Home Owner Loans UK
Experts in finding UK Homeowners the best Secured Loan or Remortgage.
See Also Abacus Debt Advice- Free Debt Advice
This material is for general information and only constitutes advice in the broadest of terms. You should not rely on this information to make any decisions. Call our advisors on 0800 043 2444 for professional advice for your own particular situation.