An Overview Of Company Insolvency Procedures

Administration is a process where a company is provided with a “breathing space” under the protection of a statutory moratorium to allow it to be rescued or (more likely) for all of some of its business to be salvaged or its assets realised for maximum possible value. 

The statutory moratorium prevents creditors from taking action to enforce their claims against the company and its assets during the administration process, which would be likely to hamper the implementation of a strategy for the company’s rescue or its restructure  or the realisation of its assets. 

The administration of a company must aim to achieve one of the following statutory objectives:

• Rescuing the company as a going concern;
• Achieving a better result for creditors than liquidation would (without an administration beforehand); or
• Realising property to make a distribution to one or more secured or preferential creditors.

The company is placed in administration and an administrator (who must be a qualified insolvency practitioner) is appointed either by a court order following an application made by creditors or the company or (more commonly) by an out of court appointment initiated by the company’s directors, the company itself (i.e. its members) or the holder of a qualifying floating charge. 

The administrator takes control of the company’s business and assets from the company’s directors in order to achieve one of the statutory purposes of administration. 

Unless extended by a court order or by the company’s creditors, an administrator’s appointment automatically ceases to have effect 12 months from the day that the company entered administration.

A Part A1 moratorium is a procedure under Part A1 of the IA 1986 which was introduced into the statute books by the Corporate Insolvency and Governance Act 2020 (CIGA 2020). 

It is designed to allow financially distressed companies a short breathing space from enforcement action by certain types of creditors while they organise their affairs to make their rescue or restructuring viable.

An important qualification on the effect of the moratorium is that it will not prevent enforcement action by financial creditors (e.g. banks, building societies, factoring and leasing companies). 

Debts owed to such creditors that fall due during the moratorium period must continue to be paid for the moratorium to remain in force. 

The moratorium can be obtained through a court filing without creditor consent for an initial period of 20 business days but is potentially extendable for much longer periods if creditor consent or a court order can be obtained. 

The company’s directors will remain in control of the company during the moratorium but an insolvency practitioner (known as the monitor) will oversee the functioning of the moratorium. 

The monitor will not have direct authority to control the conduct of the company or its management during the moratorium but can bring the moratorium to an end if it is considered that the company is no longer financially viable or is not paying critical debts as they fall due.

A Part 26A restructuring plan is similar to a scheme of arrangement but is specifically designed only for companies in financial difficulties.  This procedure was introduced by amendments to the CA 2006 made by the CIGA 2020. 

The voting majority requirements are different for a restructuring plan than for a scheme of arrangement.  Most significantly, a restructuring plan provides for what is known as a “cross class cram-down”.  This allows the court to bind dissenting creditor groups who are opposed to the plan if the plan is approved by other classes of creditors with an economic interest in the company. 

Restructuring plans can be used by companies of all sizes, however the complexity and cost of them would be deter smaller businesses from opting for this procedure. 

Large companies with more complex financial structures are more likely to benefit from restructuring plans and the history of their use to date is evidence of this.

A Part 26A restructuring plan comes to an end when the plan is either:

• Successfully implemented and completed (this means that the terms of the restructuring plan have been carried out, and the company has reorganised its debts and obligations as agreed); or
• Failed or abandoned. If the restructuring plan is not approved by the court or the required creditors/shareholders, it is deemed to have failed.  Alternatively, the company may choose to abandon the plan if it is no longer viable or unlikely to succeed.  If the restructuring plan fails to achieve its purpose of helping the company continue trading, the court or shareholders may decide to wind up the company.   

If it will not be possible to save the company or to restructure part or all of its business, the final resort will be to wind up the company (though in a solvent scenario, liquidation is used to allow a distribution of the value in the company to its shareholders, often with the goal of minimising tax). 

This involves the appointment of a liquidator (who must be a licensed insolvency practitioner) who collects in and sells the company’s assets and distributes the resulting cash (or sometimes, in solvent situations, may distribute assets without selling them) and, at the end of the process, dissolves the company. 

There are two types of liquidation:

• Compulsory – by order of the court.
• Voluntary – by resolution of the company’s shareholders.

Compulsory liquidation is commenced by the presentation of a winding-up petition, often by one of its creditors on the grounds that the company is unable to pay its debts. 

This is therefore a court-supervised procedure through which the assets of the company are realised and distributed to the company’s creditors by a liquidator. 

On the making of a winding-up order, the Official Receiver, who is a civil servant and an officer of the court, becomes the liquidator by default.  The Official Receiver can then be replaced as liquidator by an insolvency practitioner based at a private firm (usually off the back of support for their appointment from creditors). 

Once appointed, the liquidator takes control of the company’s assets and affairs.  A liquidator’s role is to fulfil the primary function of collecting in, realising and distributing the assets of the company to its creditors. 

The liquidator also has a duty to assess creditor claims and may accept, reject or seek to compromise any debt.  When the assets of the company have been realised and the liquidation is otherwise complete, the liquidator will distribute the available funds in accordance with the statutory order of priority. 

A liquidator also has a duty to investigate the reasons for the failure of the company and to report on its directors.  This may mean that certain claims are brought against the directors in relation to their conduct prior to liquidation and any responsibility for the company’s losses and insolvency.  Once the winding up is complete, the liquidator will prepare a final report and send this to the company’s creditors, the court and the Registrar of Companies.  Normally, the company is automatically dissolved 3 months after the final report is delivered.      

There are two types of voluntary liquidation:

• Members’ voluntary liquidation (MVL); and
• Creditors’ voluntary liquidation (CVL).

An MVL is a process by which a solvent company can be wound up.  A critical feature of an MVL is that the directors swear a statutory declaration of solvency that all creditors of the company will be paid in full within a 12-month period. 

In order for a company to go into MVL, its members must pass resolutions for the company to be wound up and for an insolvency practitioner to be appointed as liquidator.  The liquidator’s main function is to collect in and realise the company’s assets and to distribute the proceeds to the company’s creditors and, if there is a surplus, to its members. 

A CVL is a procedure, instigated by the members of an insolvent company, by which the assets of the insolvent company are realised and the proceeds distributed to the company’s creditors. 

At the end of the liquidation, the company is dissolved.  The process is managed by a qualified and licensed insolvency practitioner who will act as liquidator. 

Usually, a company goes into CVL after its directors realise that its business is no longer viable and that, having ceased to trade, it will not be able to pay its creditors in full.  The company’s members will pass the same resolutions as is required for an MVL (namely that the company should be wound up and an insolvency practitioner is appointed as liquidator). 

After the resolution to wind up, the company’s creditors may then appoint a different person to be liquidator of the company if they do not agree with the choice of its members. 

The liquidator’s primary function in a CVL is the same as in an MVL in terms of asset realisation and distribution, though there are additional responsibilities around reporting on the prior conduct of directors and also carrying out an investigation into the company’s affairs and the causes of its insolvency.