A company may become insolvent if it cannot afford to pay its debts. The two main definitions of insolvency are: cashflow insolvency, where the company does not have enough cash to pay its creditors; and balance sheet insolvency, where the cash and total assets of the company are less than the debts it owes.
When a company does become insolvent, there are a number of options it can take. These procedures are set out in the Insolvency Act 1986.
Company Voluntary Arrangement (CVA)
A company voluntary arrangement or CVA allows the insolvent company to come to new agreements with its creditors. These can be quite flexible and will usually see the insolvent company paying back a proportion of the money they owe over a fixed period. Creditors may agree to support a CVA application where it can be shown that they are likely to get back more of the money they are owed than they would if the company was liquidated and its assets sold off.
When a company goes into administration, a licensed insolvency practitioner is appointed as the company’s administrator. He or she takes over management of the company and will try to achieve the best possible outcome for both the company and its creditors. This may mean restructuring the business if that allows it to be rescued as a going concern, or liquidation and sale of assets if this is not possible.
Administrative receivership can be requested by creditors holding a “floating charge” over the company’s assets. Administrative receivers take over the assets and operation of the business and the most usual outcome is the sale of the company as a going concern.
Law of Property Act (LPA) receiverships may exist where the company has secured loans by mortgaging property. The LPA receivers will take control of the properties and assess the best way to recoup the debt for the creditors. This may involve selling, renting or leasing the property.
When a company cannot be saved it may have to be wound up and go into liquidation. All assets will typically be sold in order to recoup as much money for creditors as possible. A company may choose to go into voluntary liquidation if there is no other viable option. Creditors who are owed £750 or more can also start compulsory liquidation proceedings. A winding up petition is presented to the Court and, if the debt is still unpaid by the time of the hearing, the Court may issue a winding up order.