PM5.1- Types of Insolvency Overview

PM5
Types of Insolvency Overview

TYPES / FORMS OF UK INSOLVENCY

Insolvency

Personal Corporate Strike off

Individual Bankruptcy Liquidation Company Receivership Administration
Voluntary Voluntary
arrangement arrangement

Voluntary Compulsory Administrative Fixed charge LPA

Members Creditors

TYPES OF INSOLVENCY IN THE UK

CORPORATE
INSOLVENCY

Rescue Death

Company Administration Creditors Members Compulsory
Voluntary Voluntary Voluntary Liquidation
arrangement Liquidation Liquidation

COMPANY VOLUNTARY ARRANGEMENT (CVA)

✓ If a company has a viable future, but has cash flow
problems

✓ Enables the company to continue to trade with a view to
improve the position of the creditors.

✓ Creditors to be repaid on an agreed amount over an agreed
period of time.

✓ Formal arrangement between the company and its
creditors

✓ Binding all creditors if 75% or more agree to it

✓ Designed to lead to the survival of the company as a going
concern.

ADMINISTRATION

What is in “administration”?

✓ A statutory procedure designed to safeguard all
creditors’ interests

✓ Create a ‘moratorium’ provides protection from
creditors

✓ Breathing space to the company from its
creditors

✓ Enable the company to be rescued if it is at all
possible.

OBJECTIVE OF ADMINISTRATION

Objectives of Administration

1) The main purpose of administration is to rescue company as a going concern. Para 3(1)(a)
2) Achieving a better result as a whole than liquidation. Para 3(1)(b)
If it is not reasonably practicable to achieve either objective
3) realising property in order to make a distribution to one or more secured or preferential creditors.
Para 3(1)(c)

(Para 3(1) of Schedule B1 IA 1986)

ROUTES INTO ADMINISTRATION

Routes into
Administration

Court Order (para 10) QFC Holder (para 14) Company or
Directors (para 22)
Application by Application by
• QFC Holder Application by
• The company • By the Company or
• The directors
• One or more its directors

creditors
• Supervisor of CVA
• QFC Holder

EFFECT OF ADMINISTRATION

✓ No resolution may be passed for the winding up of the company
✓ No order may be made for the winding up of the company
✓ No steps may be taken to enforce security over the company's property
✓ No steps may be taken to repossess goods in the company's possession
✓ Landlords may not exercise right of forfeiture by peaceable re-entry
✓ No legal process, including legal proceedings, distress and executions, may be instituted or continued

with against the company

EXIT ROUTES OF ADMINISTRATION

Exit route from
Administration

Extension Exit via CVA Compulsory Creditors Voluntary Dissolution Hand Back To
Liquidation Liquidation Directors
An Administration lasts Rescuing the company If the Administrator considers
for 12 months from its as a going concern Where the purpose cannot The Administrator needs the company has no property to the Administration has done
inception be achieved the court’s leave to distribute distribute to creditors all it set out to do and has
to unsecured creditors paid creditors in full
It can be extended

LIQUIDATION

DEATH OF A COMPANY
Liquidation is a legal process whereby a limited
company is 'wound-up' and eventually is
dissolved, which means it ceases to exist

LIQUIDATION- PRIORITY OF PAYMENT

Pre-2002 position Up to 30 Nov 2020 Post 30 Nov 2020

LIQUIDATION

Liquidation Compulsory
Liquidation
Shareholders/investors/owners/ Director
Voluntary volunteer to end the existence of a
Liquidation company

COMPULSORY LIQUIDATION

A compulsory liquidation is a court process. It commences with the presentation of a petition to
wind up the company compulsorily

The Official Receiver (OR) is appointed liquidator

The legislation is contained mainly in s117 to s162 and part of the Rules

S122-125 IA 1986 What you can do? How you can do? R7.2-7.2 IR 201

VOLUNTARY LIQUIDATION A company can be wound up voluntarily if any fixed
duration for the company, as set out in the Articles of
S84 Insolvency Act (IA) 1986
Association
Voluntary Liquidation Event occurs which the Articles state will end the

company (End of Purpose)

Members of the company in General Meeting pass a
special resolution winding-up the company

75% of more of those who attend a ‘General Meeting

LIQUIDATION

Distinction between “members’” and “creditors’” voluntary winding up.

A winding up in the case of which a directors’ statutory declaration under
section 89 has been made is a “members’ voluntary winding up”; and a winding
up in the case of which such a declaration has not been made is a “creditors’
voluntary winding up”

S90 of IA1986

MEMBERS VOLUNTARY LIQUIDATION (MVL)

A MVL is a solvent liquidation.

The directors swear a Declaration of Solvency (if no declaration is sworn the liquidation must
proceed as a Creditors' Voluntary Liquidation).
The members control the winding up, because the creditors will be paid in full they have no
interest in how it is conducted

MEMBERS VOLUNTARY LIQUIDATION (MVL)

Purpose

This procedure is used to wind up a solvent company, which is no longer required.
Tax advantages for the shareholders, and must be used if the assets, including share capital, are
£25,000 or more

DECLARATION OF SOLVENCY (DOS)

This is a declaration, sworn by the
directors that they have made a full
Enquiry into the position, assets
and liabilities of the company and
are of the Opinion the company
can pay all Debts (including interest
and expenses) within twelve
months from the date of
commencement of Liquidation

S89 of IA1986

DECLARATION OF SOLVENCY (DOS)

WHO SIGNS?

If there are two Directors - Both must swear
If there are more than two Directors - A majority
must swear

MVL PROCESS

BM - Board Meeting
DOS - Declaration of Solvency
GM - General Meeting
Notice - Various notices
Report - Annual/Final report

STRIKE OFF

Solvent Companies

The alternatives to a members' voluntary liquidation (MVL) are either to apply under s1003 CA 06
for the company to be struck off or simply to allow the Registrar of Companies to strike the
company off
(without application)

STRIKE OFF

Procedure

✓ Directors complete an application form and file it with the Registrar of Companies with the requisite fee.
(The company must not have traded or otherwise carried on business for three months or more.)

✓ The directors must, within seven days of the application, notify interested parties namely; shareholders,
creditors, employees, the trustees of any employee pension fund, any directors who did not sign the
application and HMRC if VAT registered.

✓ The Registrar advertises the proposed dissolution in the Gazette, but will not strike the company off for
three months, pending any objections.

STRIKE OFF

STRIKE OFF

Offences and penalties

It is an offence:
• To apply when the company is ineligible for striking-off.
• To provide false or misleading information in, or in support of, an application.
• Not to copy the application to all relevant parties within seven days.
• Not to withdraw application if the company becomes ineligible.

The offences attract a fine of up to a maximum of £5,000 on summary conviction. Anyone convicted of these
offences may also be disqualified from being a director for up to 15 years.

STRIKE OFF

What happens to the assets of a dissolved company?

✓ From the date of dissolution, any assets of a dissolved company will be ‘bona vacantia’
✓ The company’s property passes to the Crown because it does not have a legal owner.
✓ The company’s bank account will be frozen and any credit balance in the account will be

passed to the Crown.

CREDITORS VOLUNTARY LIQUIDATION

UNDER SECTION123 OF INSOLVENCY ACT 1986 A COMPANY WILL BE LEGALLY AND
TECHNICALLY INSOLVENT WHEN:

✓ Its liabilities exceeds its assets
✓ It cannot pay its debts as they fall due
✓ A statutory demand has been issued by a creditor for an unpaid debt of more than £750, and

that demand has not been met after 21 days
✓ It is the subject of an non settled writ of summons
OR
The directors are unwilling to swear a Declaration of Solvency,

CREDITORS VOLUNTARY LIQUIDATION

Purpose

✓ To end the company’s existence by winding it up
✓ To realise the company’s assets
✓ To distribute the proceeds, after payment of costs
✓ To determine the assets and liabilities of the company
✓ To identify all creditors’ claims
✓ To investigate the actions of the directors (SIP 2)
✓ To report on the directors by completing a Director Conduct Report

CVL PROCESS

BM - Board Meeting
SOA – Statement of Affairs
GM - General Meeting
DP - Decision Procedure
Notice - Various notices
Report - Annual/Final report

ADMINISTRATIVE RECEIVERSHIP

Bank led control over company allowing Insolvency Practitioner to trade in order to
realise assets.
Only permitted where bank holds a pre-15 September 2003 floating charge.

FIXED CHARGE & LPA RECEIVERSHIP

A fixed charge receiver is
appointed under a legal charge or
mortgage and only has power to
deal with and dispose of the
charged property.

DIFFERENCE BETWEEN FIXED CHARGE RECEIVERSHIP (FCR) & LPA RECEIVERSHIP (LPA RECEIVER)

✓ The LPA Receiver is governed by the Law of Property Act 1926 and has to comply
with the laws set out in this statute, whereas an FCR isn’t.

✓ LPA Receiver automatically has the powers set out in the LPA 1926, namely collect
rent, insure and pay outgoings, whereas the FCR has to rely on the powers in the
charge only.

✓ LPA Receiver is entitled to a fee of 5% of realisations under the LPA 1926, whereas an
FCR will need to agree fees with the appointor.

✓ The Fixed Charge Receiver has a duty of care to the company it is appointed over.

Thank you!

Johnson Varughese

Senior Manager