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Understanding different types of corporate insolvency
Within this article we take a high-level look at the different types of corporate insolvency processes. As with every insolvency process these can be complicated and time consuming so, please feel free to contact us should you have specific questions about any of the following processes.
Company Voluntary Arrangement (CVA)
A Company Voluntary Arrangement (CVA) is a legally-binding agreement between a company and its creditors in settlement of its liabilities. The Proposal can take any form, for example, contributions from future profits, sale of assets, third party contributions or any combination.
Unlike other insolvency procedures, in a CVA, the insolvency practitioner does not replace the directors of a company. Instead, the insolvency practitioner will act as a ‘nominee’ (prior to the CVA’s approval) and ‘supervisor’ (after the CVA’s approval) to ensure the terms of the CVA are being met by the company.
Creditors are given time to consider the CVA proposal prior to their meeting, which usually takes place on the same day as the meeting of members. Creditors can question the directors and insolvency practitioner about the company’s position and the CVA proposal if they have submitted a claim and are entitled to vote.
Voting takes place, with a majority of 75% (by value of debt) needed to pass the proposal. A second vote excludes any connected parties, and if no more than half of these creditors vote against it, the proposal is passed and the CVA becomes legally-binding on all parties.
Following approval, creditors may apply to the Court if the CVA’s terms are unfairly prejudicial or if there was some material irregularity in the procedure leading up to its approval. Once approved the company can continue to trade and the directors remain in control. The CVA is monitored by a supervisor who must be a licensed insolvency practitioner. Generally, a CVA arrangement usually lasts for three to five years.
The CVA’s terms are then carried out in much the same way as any other commercial contract. If all creditors are paid what the CVA has promised, or if the supervisor is satisfied that it has substantially fulfilled its aims, the CVA will complete, and any outstanding balances will be written off.
If the company does not satisfy the terms of the CVA, for example, if it falls into arrears with its monthly payments, the CVA’s terms will often have provisions for how to deal with its termination. A CVA which terminates may lead to the company entering a subsequent insolvency procedure such as liquidation.
When a company is facing financial difficulties, it can be placed into administration. This means that, during the period for which it is in administration, the affairs, business, and property of the company will be managed by a person (‘the administrator’) appointed for that purpose. The administrator must be a licensed insolvency practitioner.
A company may be placed into administration by an order of the Court, on application by, amongst others, the company, its directors, one or more creditors, or, if it is in liquidation, its liquidator.
Without an order from the Court by the direct appointment of an administrator by the company, its directors or a creditor who holds comprehensive security of a type which qualifies him to make such an appointment.
With an Administration there is an automatic moratorium which means that it is not possible for a creditor to commence or continue legal proceedings against the company or its assets.
There are three main statutory purposes of an administration:
- Rescuing the company as a going concern, or
- Achieving a better result for the company’s creditors as a whole than would be likely if the company were wound up (without first being in administration), or
- Realising property to make a distribution to one or more secured or preferential creditors.
If a creditor is owed money by a company that has gone into administration, often the best option is to submit details of its claim on a proof of debt with supporting evidence and wait for the administrator to adjudicate upon that claim. The administrator must notify all known creditors of his appointment as soon as reasonably practicable.
The administrator’s Proposals for achieving the purpose of the administration must be issued to creditors within 8 weeks and the proposals will be agreed by creditors at a decision procedure to be held within 10 weeks
The proposals will be passed if most creditors vote in favour. Should the proposals be rejected, a decision can then be made by the courts on how to proceed. A creditors’ committee may be established at the decision procedure to assist the administrator.
The administrator can call further meetings of creditors as and when necessary and are obliged to do so if creditors with 10% or more (by value of debt) request it.
An administration automatically ends after one year however this period may be extended with the agreement of the creditors or the permission of the court.
When the administration concludes the company may be returned to the control of its directors and management; go into liquidation; dissolved (if there are no funds for distribution to unsecured creditors); or if a voluntary arrangement has been agreed during the administration, the arrangement will continue according to its terms.
A compulsory liquidation occurs when a company is wound up by an order of the Court.
A Winding Up Order is usually made when a creditor issues a Winding Up Petition against a creditor for unpaid invoices. If a Court is satisfied that the liabilities are unpaid, then a Winding Up Order will be made, and the company will go into liquidation with The Official Receiver being appointed Liquidator.
The Official Receiver must decide within twelve weeks of the winding-up order whether to call a meeting of creditors to appoint an independent licensed insolvency practitioner to act as liquidator. If he does so, then the appointment of a liquidator will be made by a simple majority of creditors. A creditors’ committee may be established at the decision procedure to assist the liquidator.
The liquidator will write to all the known creditors asking them to submit a claim. A claim must be submitted to the liquidator in writing, providing supporting evidence, e.g., copy statements, invoices, correspondence etc.
This will allow the liquidator to adjudicate on the claim using the company’s records and any other available information. The liquidator may discuss the claim with the directors and ask for additional information in support of the claim if the Official Receiver remains in office the only reports that will be sent to creditors will be on closure of the liquidation. An independent liquidator is also obliged to submit annual progress reports.
The liquidation is complete when all the assets have been realised, all creditors’ claims have been adjudicated (where there are sufficient funds) and net realisations after expenses of the liquidation have been distributed to the creditors.
A final report of the liquidator is sent to creditors at the end of proceedings and unless creditors object to the release of the Liquidator, the liquidation will be closed.
Dealing with insolvent debt can be difficult and, in some cases time-consuming. Having a business partner to support you through this process can make a huge difference to the success of your claim.
Our creditor services team at Restart BTi can assist with the entire claims process no matter what type of insolvency you are dealing with. We will lodge your initial claim, deal with any queries, and make sure that important deadlines are met. We will oversee fee approvals on your behalf and call on our own licensed Insolvency Practitioner when we feel that an independent review or investigation may be required.
We can represent clients at meetings or on committees and will ensure that the difficult questions are asked to endeavour to get the best possible outcome for our clients. With our wide network of support, we can engage with other creditors and seek further support to guarantee that your voice is heard.
Our bespoke case management system, Divisi, ensures that we proactively monitor your insolvency portfolio, providing transparent reporting via our web-based portal.
This service is offered to our clients at no charge so if you want to remove the burden of managing your insolvency documentation and enhance your dividend prospects, then please contact Paul Hughes on 01246 959388 for further information.
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