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LPC- BLP MODULE - COMPANY INSOLVENCY (DISTINCTION)
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notes on corporate insolvency - liquidation and administration etc
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BLP– Company Insolvency.COMPANIES DO NOT GO BANKRUPT. DO NOT STATE THAT THEY DO IN THE EXAM – IT IS WRONG
AND THEREFORE YOU WILL LOSE MARKS FOR SAYING IT EVEN IF YOUR GENERAL KNOWLEDGE IS
CORRECT.
Cash flow problems
• Company needs to take positive action when liabilities exceed assets
• Company is insolvent – needs to get more cash in and/or sort out its debts – it cannot pay its
debts as they fall due.
• Creditors will want payment.
• Directors will have to be careful they do not incur personal liability.
Other sources of finance
• Should always consider these steps before thinking insolvency:
o Calling in all debts owed to the company
o Investment from venture capitalists
o Selling off “debts” owed to the company i.e. factoring
o EU/Government funding
Aims of corporate insolvency
• Protect creditors
• Balance interests of different groups of creditors
• Control (and punish?) directors
• Promote rescues
• Differs from personal insolvency; company may cease to exist…
Types of corporate insolvency
• CVA – Company Voluntary Arrangement
• Administration
• Receivership – often results in liquidation
• Liquidation – Member’s Voluntary, Creditors Voluntary or Compulsory
Majority of corporate insolvency situations end in Liquidation, which results in the company being
wound up.
There have been legislative changes to try to redress the balance – aims to give struggling companies
the chance to survive by allowing rescues.
• Principal legislation is Insolvency Act 1986 (IA86)
• Amended by Enterprise Act 2002 (EA02):
o removed the ability of a floating charge holder (FCH) to appoint an “administrative
receiver”
o made administration more streamlined and cost effective.
CVA
• Agreement by creditors to forgo / wait for part of their debt
• Requires the support of anyone who could appoint a receiver
• Can be used by solvent or insolvent companies
• Company continues to trade and will have better realisation of assets if it goes well.
• Cheapest insolvency procedure.
, Key elements and procedure:
• Directors put written proposal to creditors
• Nominee (insolvency practitioner) reports to the court on the proposals
• Moratorium for small companies – simply means that nobody can pursue the company for
its debts
• Creditors vote
• Nominee becomes “supervisor” – takes control of assets subject to the CVA
Administration
• Administrator is appointed to manage the company. They will carry on running the company
– moratorium on creditor actions.
• Administrator is an officer of the court but no longer have to go to court for the
appointment. They can be appointed by the court (following application), or out of court by
the creditors, the directors or the company.
• Aim is to rescue the company or ensure a better realisation of assets compared to
liquidation or obtain agreement to a CVA
• Administrator must be an insolvency practitioner
• Administrator must act in interests of all creditors
Procedure
• Administrator makes proposals to the creditors – to get their approval
• The number of meetings with creditors depends upon whether they will be paid in full.
• Administrator will manage the company in accordance with the approved proposals. The
administrator will control the assets since the directors lose their powers.
Powers and duties
• The administrator is an agent of company; but not personally liable on any contracts he
makes.
• Power to do anything necessary or expedient to manage the company
• The administrator can appoint or remove directors, call creditor meetings, pay creditors and
apply to the court for direction.
End of Administration.
• Automatically ends after 1 year
• Administrator can apply to the court if the purpose has been achieved or cannot be achieved
• Administrator can convert the admin. into a creditors’ voluntary liquidation
• Court can convert the administration into liquidation .
Receivership.
Technically not a insolvency procedure.
• A lender appoints someone to take charge of the company under the terms of a loan
agreement
• Task of receiver is to take possession of the charged property for the benefit of charge
holder. In simple terms, they sell it.
• Receivership normally leads to liquidation as there are often few useful assets left in the
company after the charged property is taken.
• When there is not sufficient assets to satisfy all debts, the liquidator or administrator will
want to see if the pool of assets can be increased
• Have the directors dispersed assets to keep them away from a Liquidator or Administrator?
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