A quick guide to corporate insolvency

When is a company insolvent?

A company is insolvent if its assets are insufficient to discharge its debts and liabilities.
Often, an insolvent company:

• Is unable to pay its debts as they fall due (cash-flow insolvency).
• Has liabilities in excess of its assets (balance-sheet insolvency).

What are the risks for directors of an insolvent company?

Directors of insolvent companies owe their duties to the company’s creditors, not to its shareholders. Directors who are concerned about the financial position of their company must consider their actions carefully and take specialist advice.
If an insolvent company goes into administration or liquidation:

• Its directors can be sued in their personal capacity for losses made by creditors if the directors continued to trade after the company had become insolvent (wrongful trading).
• The administrator or liquidator reports to the Department for Business, Enterprise and Regulatory Reform (www.practicallaw.com/2-107-6088) (BERR) on the conduct of the directors and, if appropriate, BERR will bring director disqualification proceedings.

These risks are in addition to any liability that the directors have for any breaches of duty to the company.

What are the options for an insolvent company?

Administration

In administration, a company is protected from creditors enforcing their debts while an administrator (a qualified insolvency practitioner) takes over the management of the company’s trading and affairs. The administrator operates the company with a view to reorganising it, or selling some or all of its business or assets.

In some cases, a deal to sell the company’s business and assets is negotiated before the administrator is appointed and completed immediately on appointment. This is called a pre-packaged administration sale or pre-pack.

Liquidation

Liquidation is a procedure by which the assets of a company are placed under the control of a liquidator (a qualified insolvency practitioner). In most cases, a company in liquidation ceases to trade, and the liquidator will sell the company’s assets and the distribute the proceeds to creditors.

Company voluntary arrangement (CVA)

A CVA is an agreement between a company and its creditors, by which the company compromises its debts or agrees an arrangement for their discharge. If the necessary majority of creditors approve the CVA at a creditors’ meeting, then the CVA will bind all creditors (except those with security over the company’s assets).

Receivership

The holder of security over a company’s assets may appoint a receiver to sell the assets in question and pay the proceeds to the charge-holder in satisfaction of the secured debt.