Out-Law Guide | 09 Jul 2007 | 3:50 pm | 4 min. read
This guide is based on UK law as at 1st February 2010, unless otherwise stated. It is part of a series on Financial difficulty and insolvency.
The following is a brief summary of insolvency procedures.
Administration will have one of three purposes. These, in order of desirability, are:
Administrators can only opt for the second purpose if they think that the first is not likely to be achieved or is not in the best interests of the creditors as a whole. They may not seek to achieve the third (fallback) purpose unless they think neither the primary nor the secondary purpose is likely to be achieved and no unnecessary harm will be caused to the interests of creditors as a whole.
The advantages of an administration order are that, without the consent of adminstrator or leave of the court:
Once an administrator has been appointed they will take over the management of a company. This will relieve the directors from taking the critical day to day decisions and therefore minimise any risks of liability from that point on.
There are now three methods of appointing an administrator. These are explained below.
A company, its directors or one or more creditors can apply to the court for the appointment of an administrator. The court may appoint an administrator only if it is satisfied that a company is, or is likely to become, unable to pay its debts and that the administration order is reasonably likely to achieve one of the three potential purposes explained above.
A QFC is a floating charge over the whole or most of a company’s property and is created by a document that states that paragraph 14 of Schedule B1 to the Insolvency Act 1986 applies – or, more specifically, that the holder of the floating charge may appoint an administrator or (if the floating charge was created before September 15, 2003) an administrative receiver.
A company or its directors can appoint an administrator without a court order – i.e. make an “out of court” appointment. They will, however, be unable to do so if within the previous 12 months any of the following applied:
A CVA is an arrangement whereby the company continues to trade having reached an agreement with its creditors in satisfaction of its pre-existing debts, usually for a percentage of their face value. It can be used in cases where a liquidator or an administrator has already been appointed. The directors propose the arrangement and put it before unsecured creditors for approval. Copies of the agreed arrangement are filed at court.
The procedure to put a CVA in place, and the implementation of a CVA, must be supervised by an accountant qualified to act in insolvency matters – i.e. an insolvency practitioner.
A CVA is not necessarily a “once and for all” solution. A creditor may subsequently apply to a court on the grounds that there is significant irregularity with the CVA or that their interests are being prejudiced.
Until a CVA takes effect, a company will be unable to prevent creditors from enforcing their rights unless additional protection is sought from the court.
There are two types of voluntary winding-up. Both have the same result: bringing the life of a company to an end.
A compulsory winding-up can be started without the involvement of a company’s shareholders. A petition is filed at court, and at a hearing some weeks later the court decides whether to make a winding-up order. If it does, the company is then in liquidation. The petition is usually filed by creditors.
A receiver may be appointed by the holder of a fixed or floating charge granted by a company. Typically, a company will be served with a demand for repayment of monies due, and this will be followed by an appointment just hours later. Alternatively, a company may invite a charge-holder to appoint a receiver.
The receiver’s task is to recover sums due to the secured lender or to realise the lender’s security.
Historically, an administrative receiver has been appointed by the holder of a floating charge covering the whole, or substantially the whole, of the company’s property. Receivers, by contrast, have been responsible solely for assets subject to a fixed charge.
Administrative receivership, however, is dying out: the provisions of the Enterprise Act 2002 effectively abolished it for charges created after September 15, 2003.