Understanding Company Insolvency
The United Kingdom has a well-established legal framework for insolvency, which provides for the efficient resolution of financially distressed companies. Insolvency is the state in which a company is unable to pay its debts as they become due, or its liabilities exceed its assets. Professional investigators will regularly be instructed concerning the status of companies and should be familiar with meaning of insolvency.
In the UK, insolvency law is regulated by the Insolvency Act 1986, which sets out the procedures for dealing with insolvent companies and individuals.
There are two main types of insolvency procedures in the UK: liquidation and administration.
Liquidation is the process of winding up a company's affairs and distributing its assets to its creditors.
Administration, on the other hand, is a form of corporate rescue that aims to save the company as a going concern.
Liquidation
Liquidation can be initiated by either the company's directors or its creditors. The company's assets are sold off, and the proceeds are used to pay off its creditors in a predetermined order of priority. Any remaining funds are distributed to the shareholders.
There are two types of liquidation: compulsory liquidation and voluntary liquidation.
Compulsory liquidation is initiated by a court order, usually at the request of a creditor who is owed a significant amount of money.
Voluntary liquidation, on the other hand, is initiated by the company's directors and shareholders.
Administration
Administration is a process that allows a company to be restructured and continue trading. It is initiated by the directors or the company's creditors and is designed to give the company breathing space while a restructuring plan is put in place.
During administration, the company is protected from legal action by its creditors.
The administrator's role is to assess the company's financial situation, develop a restructuring plan, and negotiate with creditors to reduce the company's debts. If the restructuring plan is successful, the company can emerge from administration and continue trading. If the plan fails, the company may be liquidated.
In addition to liquidation and administration, there are other insolvency procedures available in the UK, including Company Voluntary Arrangements (CVAs), which allow a company to reach an agreement with its creditors to repay its debts over a set period of time, and Individual Voluntary Arrangements (IVAs), which are similar to CVAs but are designed for individuals.
CVAs and IVAs can be a useful tool for companies and individuals that are facing financial difficulties but want to avoid the more drastic step of liquidation or bankruptcy.
However, they are only suitable for companies or individuals that have a viable business or income stream that can be used to pay off their debts.
In addition to the Insolvency Act 1986, there are other laws and regulations that govern insolvency in the UK, including the Companies Act 2006 and the Insolvency Rules 2016.
Overall, the UK's insolvency framework is designed to provide a fair and efficient process for dealing with financially distressed companies and individuals.
Insolvency is a complex area of law that requires specialist expertise. Professional investigators will regularly be instructed concerning the status of companies and should be familiar with meaning of insolvency.
Tony Imossi - Secretariat@theABI.org.uk
