A Quick Guide on Corporate Insolvency in UK
A petition for bankruptcy as a final step after announcement of corporate insolvency in UK

A Quick Guide on Corporate Insolvency in UK

Introduction

Many questions may arise when a corporation becomes insolvent. Is it able to be rehabilitated or at least enhanced before being liquidated? What assets will be considered available for distribution among its creditors if liquidated? Who are to be treated as creditors, and how are the various classes of claims to be ranked? In what circumstances does a company enter into transactions before its dissolution is null and invalid or is subject to an annulment? How should recoveries be handled?

All of these and other issues fall under the purview of corporate insolvency law. This article aims to expose all the problems that corporate insolvency in the UK must address.

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Insolvency Legislation in the UK

A director reading the documents related to Corporate Insolvency in UK

When a corporation declares insolvency in the UK, it must comply with all of the laws that govern the insolvency process in the United Kingdom. The Insolvency Act 1986 and The Insolvency Rules 2016 are the primary pieces of legislation for corporate insolvency in the UK.

When a Corporate is Declared Insolvent?

It is simple to deduce that an instance of corporate insolvency in the UK exists. When a company cannot pay its debt, it is considered insolvent. In other words, a corporation is insolvent if its assets do not cover its obligations and liabilities. As the companies go insolvent, the directors have liability for fulfilling certain responsibilities like ceasing trade, and overdrawing a large sum, which could result in sanctions and allegations.

The Insolvency Act of 1986 does not specify when a company becomes insolvent. However, everything depends on when a corporation is “unable to pay its debts.” Section 123 of the Act establishes two primary criteria for assessing whether a corporation cannot pay its debts.

  • The “cash flow test” is stated in Section 123(1) of the Act, which states that a company is deemed insolvent if (among other things):
  • It is proven to the court’s satisfaction that the corporation is unable to fulfil its commitments as they come due; or
  • A creditor who filed a written demand over £750 has not been met, or the amount has not been resolved to the creditor’s reasonable satisfaction within three weeks of the creditor’s demand; or
  • A court has ordered execution, payment, or procedure in favour of a creditor, and the order has been returned unsatisfied (in whole or part).
  • The “balance sheet test“. Section 123(2) of the Act states that a firm is judged unable to pay its obligations if it can demonstrate to the court that its assets are worth less than the number of its liabilities, including contingent and prospective liabilities.

If sufficient evidence shows that a corporation fails either of these requirements, it is termed insolvent because it lacks adequate assets to satisfy its debts or cannot pay its payments on time. In reality, the tests are frequently challenging to determine, especially in borderline circumstances where contingent or unquantifiable hazards occur or when deciding how far into the future to examine or foresee when applying the tests.

What are the Insolvency Procedures?

The Act specifies the procedures that a case of corporate insolvency in the UK must follow. There are four types of insolvency procedures. The first is about a corporation that will not be resurrected and dissolved. The final three can save the company or its business.

  • Liquidation 
  • Administration (ADM)
  • Administrative receivership (ADR)
  • Company Voluntary Arrangement (CVA)

Furthermore, the Companies Act 2006 (CA 2006) provides for the following procedures:

  • a scheme of arrangement;
  • a restructuring plan; and
  • dissolution.

Finally, an enforcement technique frequently combines a contractual remedy with provisions in the Law of Property Act 1925 (LPA) regarding the appointment of a fixed charge receiver.

Common Options Regarding Corporate Insolvency in UK

A client reading the petition for bankruptcy of their company

There are various choices available if a corporation has been declared to fall into corporate insolvency in the UK. You can visit the LegaMart directory and employ a lawyer to grasp all the options that suit your case based on your questions from your smartphone.

Yet, to give you brief information, below are the standard options to consider:

Liquidation

In the case of corporate insolvency in the UK, there may be no suitable alternative course of action if a corporation cannot pay all of its debts other than putting the business into liquidation. Liquidation is a terminal procedure; unlike other forms of insolvency, the corporation will not be resurrected and eventually dissolved. The liquidation process entails the appointment of an insolvency practitioner (the liquidator) to gather and realize a company’s assets before distributing the realizations per a stipulated statutory order to (partially) fulfil the company’s liabilities.

Liquidation comes in two flavours: compulsory liquidation and voluntary liquidation. A member’s voluntary liquidation can also be used to wind up a profitable business. It is rare for a company to be resurrected or salvaged after it has been liquidated.

The corporation must stop operating in both forms of liquidation, except what is required for its beneficial winding-up. Additionally, the directors’ authority ends in both forms of liquidation. However, the business continues to exist as a legal entity until it is dissolved and is still obligated to fulfil its contractual obligations.

Administration

The administration regime, which is a hybrid approach when facing a case of corporate insolvency in the UK, is outlined in Schedule B1 to the Act. A statutory purpose for an administration must be one of three:

  • To save the business as a going concern, or if this is not possible;
  • To produce a greater overall return for creditors than would be probable if the company were wound up without first going through administration or if this is not practicable;
  • To sell the property to pay off one or more secured or favoured creditors.

During the initial administration stage, creditors are barred from taking action against the company. Administrators might seek to reorganize the business or devise a more effective way to sell the company’s assets. Administrators are required by law to market and sell the company or any components worth salvaging as a continuing concern. Without this, the administrator must choose the best way to realize the assets, so they are worth more to creditors than if the company was liquidated.

Administrative Receivership

When a business borrows money, the company or organization lending the money frequently requests some form of collateral against the business’s assets as a secured creditor (fixed or floating charge holder).

The administration is distinct from administrative receivership. Under section 29 of the Act, a holder of a floating charge over all or nearly all of a company’s assets may be allowed to name an administrative receiver over the business. The appointment holder in administration is responsible for all unsecured creditors, whereas the administrative receiver only has a duty to that particular lender.

Unsecured creditors cannot initiate administrative receiverships. However, they can start the administration procedure (as described in section 3). 

The enterprise act of 2002 eliminated administrative receivership, making it the least common insolvency option today. The ability of a floating charge holder to name an administrative receiver was significantly constrained by a change in legislation in 2002. It is still permissible to designate an administrative receiver with a charging instrument signed before September 15, 2003, or with a few specific, limited exclusions, like a capital markets exemption. However, administrative receivership is extremely rare, and the holder of a floating charge will often need to appoint an administrator rather than an administrative receiver.

Company Voluntary Agreements(CVA)

A wooden hammer and its stand with a board of insolvency

A company voluntary arrangement (CVA) is a method that allows an over-indebted company, or in other words, a company in the case of corporate insolvency in the UK, to reach an agreement with its creditors on how to handle its obligations. Companies that fit within corporate insolvency in the UK can use this method with other insolvency procedures, such as administration. Combining a CVA with an administration can benefit from the automatic moratorium that applies to administrations.

A voluntary arrangement is defined in Section 1 of the Act as either a composition in payment of its obligations or a scheme for organizing the company’s affairs. In essence, a CVA provides a company that falls into corporate insolvency in the UK with a “second opportunity” to restructure its operations voluntarily (but with specific options) without filing for terminal bankruptcy. A CVA can also be used as a distribution method when it is preferable to avoid liquidation procedures. A corporation does not have to be formally bankrupt to undertake a CVA.

CVAs involve arrangements between administrators and creditors based on proposals made by the directors, the liquidator, or the administrator if the firm is in liquidation or administration. The CVA becomes effective after the members and creditors have accepted it. On the other hand, the CVA can be challenged in court within 28 days after its filing for unfairness or severe irregularity in the voting processes and reports of the members’ and creditors’ votes. As a result, the CVA generally becomes effective at the end of the 28-day challenge.

Conclusion

It is undeniable that the UK is the ideal location for entrepreneurs, small businesses, and startups to establish businesses. However, with the outbreak of the COVID-19 pandemic, many problems have arisen, leading to companies going bankrupt. One thing to keep in mind is that anyone participating in corporate insolvency in the UK should seek counsel as soon as possible to minimize business harm and lessen the personal impact on themselves.

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