What is insolvency?
Insolvency is when a business or person is unable to pay their debts when they become due. When a debt remains to be paid and is outstanding, the creditor reserves the right to issue a statutory demand to the debtor, and (subsequently) a winding up petition or a bankruptcy petition if the amount specified in the demand remains unpaid for a period of 21 days.
Insolvency can have a variety of negative impacts including:
- Late-payment interest
- Adverse impact on credit file
- Difficulties in obtaining any form of credit such as loans and other financial products and services
When a company becomes insolvent, the Directors must ensure that the company follows an insolvency procedure, such as administration or liquidation. Directors are therefore responsible for identifying when their company becomes, or is likely to become, insolvent. Directors should also assess the alternative options open to the company to avoid insolvency as detailed below.
Company Voluntary Arrangements (CVAs) and Individual Voluntary Arrangements (IVAs)
A voluntary arrangement is a legal agreement which can last up to 5 years. The debtor’s debts are often negotiated/renegotiated with the Creditors, and where possible they can be reduced with an agreement from the debtor that they will continue to repay the agreed amounts throughout the CVA/IVA term.
The debtor would generally make their debt repayments to an insolvency practitioner (IP), who then distributes the money to the debtor’s creditors.
IVAs and CVAs can impact the debtor’s credit score as the arrangement will remain visible on their credit file and the insolvency register for six years.
Administration
In an administration, an independent insolvency practitioner takes over management of the company to attempt to rescue it as a viable business. It is essentially a rescue process to try to rescue the business as a going concern, and to pay debts to secured creditors, or achieve a better outcome than going through a liquidation.
The administrator would be responsible for reviewing the financial position of the company and its assets, and would then submit a proposal to the creditors.
During the administration,a statutory moratorium is used to prevent creditors from taking legal action against the company’s assets whilst the Administrator works towards rescuing the company.
The process of administration typically lasts for 12 months, but this can be extended or shortened with the consent of creditors or an order from the court.
Administration can be entered intoout of court or by way of a formal application to the court. The out of court process is generally the preferred option as it is more straightforward, takes less time and costs less.
Liquidation
Liquidation is the process of selling the debtor’s assets to pay off their debts. In the liquidation of a company, the company would then distribute any remaining money (after the debts are repaid) to its shareholders.
Involuntary liquidation
Involuntary liquidation, also known as compulsory liquidation, is a court-ordered process that forces a company to stop trading because it is unable to pay its debts. The process is usually initiated by a creditor of the company, who files a Winding Up Petition (WUP) with the court.
Voluntary liquidation
A company’s shareholders or directors decide to dissolve the company, usually because it is no longer feasible to operate or the company is insolvent.
Members’ voluntary liquidation (MVL)
A MVL is a type of voluntary liquidation where the shareholders of a company vote to sell the assets of the company while it is still solvent.
Creditors’ voluntary liquidation (CVL)
A CVA is an insolvency procedure where the directors of a company make the necessary arrangements to place their company into liquidation.
What is a statutory demand?
A statutory demand is a legal document which sets out the details of a debt, including the full amount due and a warning to the individual or business that insolvency proceedings will follow if the debt is not paid within 21 days, or if the statutory demand is not set aside within 18 days.
Statutory demands should only be used where the debt is uncontested and if the debtor has no defence as to the validity of the debt claimed. The consequences of insolvency proceedings being issued against the debtor presents a real threat to that person or company’s credit rating and financial security, which the debtor will do all they can to avoid, unless they are incapable of paying the debt, in which case insolvency may be the only option to try to the creditor to recover some if not all of the amount/s owed.
In cases where there is a defence to the debt, such as non-performance of a contract, it is possible to set aside the statutory demand within 18 days of its service. There can therefore be adverse costs consequences for wrongly issuing a statutory demand against a debtor who has a defence to the debt, or even a counterclaim against the creditor.
Given the very short timeframes involved in replying to, paying, or setting aside a statutory demand, we would urge anyone who has received a statutory demand to seek legal advice at the earliest possible convenience.
Winding up petition against a business for an unpaid sum of money
If the debt is owed by a business, then the Creditor may issue a winding up petition to the court to ‘wind up’ a business which appears to be incapable of paying its debts following the issue of a statutory demand for the money owed. Most business owners will not want their business to be struck of the company register and will want to continue trading, it is therefore possible that the threat of insolvency should encourage a settlement if payment can be made by the debtor.
In the event that a winding up order is made by the court, then an administrative receiver would be appointed to take over the company’s affairs. If there are sufficient assets held by the company, these assets can be realised to repay its debts.
Bankruptcy petition against an individual for an unpaid sum of money
If the debt is owed by an individual, the creditor may issue a bankruptcy petition to the court to bankrupt the individual if they cannot repay their debt. A bankruptcy order can significantly affect an individual’s ability to obtain credit for 6 years following the bankruptcy, and it will also prevent the individual from operating a bank account for 12 months.
The value of a bankrupt’s possessions is usually shared out amongst their creditors. This can include their house, car, leisure equipment and jewellery (everything except the essentials for day-to-day living). Depending on their income, they can also be asked to make payments towards their debts for up to three years.
Given the particularly undesirable results of a bankruptcy order, an individual will generally want to do everything they can to avoid bankruptcy and it can therefore be a highly effective method to recover a debt.
Why Ambrose Crookes Solicitors?
We help individuals and businesses to realise and consider the alternative options available to them in an insolvency situation, such as: –
- Business turnaround
- Restructuring
- Insolvency
- Company Voluntary Arrangements (CVAs)
- Individual Voluntary Arrangements (IVAs)
- Receivership
- Liquidation
- Commercial recoveries
Where insolvency is the only viable solution, we can advise and act for you or your business during insolvency court proceedings. In some cases it is possible to adjourn hearings for petitions made to the Insolvency Court to allow the debtor some time to pay.
There can also be a range of defences open to a debtor if (for example) the amount claimed in a statutory demand and/or petition is contested on issues such as time limitation (the debt may be time barred) or non-performance from the creditor, where they were obliged to do something in consideration for the money owed and did not perform their duties fully.
We offer a free consultation without obligation should you wish to discuss your matter with us so that we can advise you on the options available to you. We encourage you to contact us if you have any questions or would like any further information.