Question Time - Corporate Distress
2009 is beginning with more and more retailers closing their
doors and the press is full of stories about companies teetering on
the brink of collapse, they are going under, calling in the
receivers, going into liquidation.
United Kingdom
Insolvency/Bankruptcy/Re-Structuring
2009 is beginning with more and more retailers closing their
doors and the press is full of stories about companies teetering on
the brink of collapse, they are going under, calling in the
receivers, going into liquidation. But what do these terms mean and
is there any differences between them?
Back in 2002 the Government decided to promote a "rescue
culture", that encouraged responsible risk taking in business.
This was a significant change in approach and the aim of the new
insolvency laws was to try and obtain the best recovery rates
possible for creditors by rescuing and restructuring businesses
rather than just closing them down and selling off their assets.
The new legal framework aims to balance the interests of creditors,
to promote corporate rescues, recoveries and restructurings and to
make sure directors of insolvent businesses are properly dealt
with.
So firstly, what does it mean when a company is insolvent?
There are two tests commonly used. The first is the cashflow
test – by this test a company is insolvent if it cannot
pay its debts as they fall due. In certain circumstances this can
be supplemented by a balance sheet test. A company that can pay its
debts as they fall due could still be insolvent if, by looking at
its balance sheet, its liabilities exceed its assets.
Having established that a company is indeed insolvent
– what is the next step?
1.
Administration
If the company has some ongoing
business activity which may be saleable, the most common approach
is for the company to be put into administration. This procedure is
designed to allow reorganisations or more efficient sale of assets
during a period of a statutory moratorium. This acts as a block on
any actions being taken by creditors during the period of the
administration and allows the administrator time to agree and
implement a plan. Legally the administrator has a threefold
purpose, first if possible, he must promote the rescue of the
company or any suitable parts as a going concern, if survival is
not possible then he must attempt to obtain a better realisation of
assets for creditors as a whole than he would have achieved in
liquidation, and if even that is not possible then he must confine
his activities to realising assets with a view to distributing the
sums gained to preferential and secured creditors.
Administrators can be appointed
cheaply and quickly using an out of Court procedure by any secured
creditor or by the company itself or its directors. A trade
creditor would require to go to court to get an administrator
appointed and in complex administrations with overseas assets
involved a court appointment can be preferable.
Administrators have very wide powers
to deal with the assets of the Company as they see fit without
consulting with creditors or management. At the end of the
administration procedure which can last for up to 1 year, the
Company will either have come out of administration and returned to
trading, it can be liquidated to allow realisations to be
distributed, or it can be dissolved if there is no cash to
distribute.
2. Liquidation
If a company is aware there is
absolutely no hope of survival or reconstruction of its business,
liquidation is the only option (also called winding up). If a
company no longer has any active business worth realising then a
liquidator will be appointed to realise its assets and distribute
them to creditors. This is the end of the road for the company and
there are two options available here:-
(a) creditor's voluntary
liquidation – this occurs when the shareholders of the
company resolve the company is no longer able to pay its debts and
that a liquidator should be appointed. They select an initial
liquidator although the creditors may change the liquidator if they
are dissatisfied with the choice.
(b) compulsory liquidation
– this usually occurs where a creditor applies to the
Court to have the company wound up.
At the end of the liquidation process the company is dissolved.
During the liquidation process all securities in place can be
enforced but no new court actions can be raised against the company
without specific permission.
3. Administrative
Receivership
Strictly speaking this is not an
insolvency procedure. Holders of floating charges dated prior to 15
September 2003 are able to appoint an Administrative Receiver to
realise assets and pay off their debt. The administrative receiver
acts only for the holder of the charge and is not interested in
saving the company or assisting unsecured creditors. These are
becoming less common.
4. Company Voluntary
Arrangements/Schemes of Arrangement
These are used to supplement other
kinds of insolvency procedures, for example, they can be combined
with administration. A CVA allows the administrator to agree
proposals with the creditors and implement these. A Scheme of
Arrangement is more complex and has to be approved by the Court.
Any such scheme if correctly implemented is binding on all members
or creditors, no matter whether or not they consent, which can be
essential.
Directors of insolvent companies are allowed to become directors
of new companies unless they are subject to disqualification orders
or they become personally bankrupt but there are restrictions on
using the name or trading name of a company which goes into
liquidation. In that case directors for the previous 12 months
prior to liquidation may not be involved in any business with the
same or similar name for the period of 5 years. Breach of this is a
criminal offence which can lead to imprisonment or a fine and the
relevant director can incur personal liability for the
company's debts.
For companies concerned about insolvency getting advice sooner
rather than later is vital in order to minimise impact on the
directors personally and maximise protection for the business.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
