#14693 - Company Insolvency - Business Law and Practice

Company Insolvency

Charges

A Fixed Charge over assets means the debtor cannot trade or dispose of the asset without the creditor’s consent. When there are multiple charge holders over the same assets and one charge holder cannot be paid in full, the remainder of their debt will be held as an unsecured creditor. If there is enough to pay both, the charge holder who created the charge first will be paid off, with the rest of the money going to the second charge holder.

A Floating Charge is a charge over a class of assets constantly changing (e.g. stock or contracts). This charge crystallises and becomes fixed over the assets when it is enforced or the company becomes insolvent. The charge holder remains a floating charge holder.

Informal Arrangement

A company can enter into informal negotiations with their creditors to agree alternatives to going into insolvency, this can include additional payment, security provided or non enforcement of debts.

Creditors do not have to agree to this, although it may be a good way to save the company and ensure the creditors have their debts paid.

Company Voluntary Arrangement

The purpose of this procedure is to rescue the company or allow for the better realisation of assets. The directors can appoint an insolvency practitioner who helps them draft proposals and calls meetings of creditors and shareholders to approve the proposals. The directors will still continue to run the company under the terms of the CVA.

Administration

The purpose of administration, under Schedule 1B Paragraph 3(1) IA is to rescue the company. If this cannot be done then the administrator should try and achieve the best result for the creditors. If this is not possible, then the administrator should realise property to distribute to the company.

The directors of the company, or the Qualified Floating Charge Holders (QFCH) can apply for administration (as defined in Schedule 1B Paragraph 14 IA) and appoint an administrator.

The administrator owes their duty to the court and must act in the best interests of all of the creditors. Immediately after appointment of the administrator, a moratorium will be present which can prevent all other claims for enforcement of debts and other applications to wind up the company.

Administrative Receivers

An administrative receiver is appointed by a QFCH which are created before the 15 September 2002 under the terms of a debenture (EA 2002). The administrative receiver realises the property to repay the charge holder. The administrative receiver’s duty is to simply recover the assets the charge relates to (‘smash and grab’ style recovery) and owes their duty to the QFCH who appointed them.

Liquidation/Winding Up

Liquidation is the realisation and distribution of the assets of a company in the order of priority. The company will be liquidated on the grounds that the company cannot pay its debts (s.112(1)(f)). The liquidator has the responsibility of collecting and realising assets and maximising the assets by challenging voidable transactions or suing the directors for wrongful/fraudulent trading.

Compulsory liquidator can be initiated by a court order or by a creditor who claims the company is unable to pay its debts. A voluntary liquidation can be initiated by a special resolution of the shareholders.

Order of Priority