Insolvency Procedures: What Directors Need to Know
You may be considering your options if your company is insolvent or facing intense creditor pressure.
Insolvency procedures can take many forms, each with its benefits and drawbacks. From liquidation to administration, a range of options is available to directors struggling to keep a business afloat.
This article will provide an overview of insolvency procedures and explore the common options available to directors. We’ll also discuss directors’ duties and liabilities in insolvency situations and offer advice on how to avoid personal liability.
Types of Insolvency Procedure
When it comes to choosing the right type of insolvency procedure, it’s important to remember that directors do not have to make the decision alone. In fact, seeking professional advice from an insolvency practitioner is essential in determining the best course of action.
Insolvency practitioners, such as ourselves, deeply understand the legal and financial implications of different insolvency procedures. We can assess the company’s financial situation, advise on the available options, and help you understand the benefits and drawbacks of each option.
Here are the common insolvency procedures used in the UK.
Liquidation is the process of formally closing a company and distributing its assets.
For directors facing insolvency, a voluntary liquidation (known as a ‘creditors voluntary liquidation’) is a procedure allowing directors to close their company before creditors can do so via a compulsory winding-up process.
Voluntary liquidation gives you more control throughout the process.
|Definition||A Creditors’ Voluntary Liquidation (CVL) is a legal process used to wind up a company that can no longer pay its debts. The process is initiated by the company’s directors and involves appointing an insolvency practitioner (IP) to sell off the company’s assets and distribute the proceeds to creditors.|
|Timeframe||Up to 1 year, depending on the complexity of the case and the amount of assets to be realized.|
|Cost||The estimated cost of a CVL is typically between £4,000-£6,000 + VAT.|
|IP Required||Yes, an insolvency practitioner must be appointed to ensure fair play for creditors.|
|Directors Role||The directors role ceases once the IP is appointed, other than supporting the IP with information gathering|
Generally, only appropriate for larger companies with a solid underlying business with significant assets, a company that goes into administration gets protection from legal action whilst an insolvency practitioner assesses the business situation.
Administration commonly involves restructuring and employee layoffs as the administrator establishes if the company remains viable. Successful administrations can end with the business re-entering profitability and living to fight another day. On other occasions, the administration becomes a liquidation, and the company is closed.
|Definition||Administration is a company rescue process that offers the best return to creditors by keeping a company afloat.|
|Timeframe||Up to 12 months, but it can be extended with creditor approval.|
|Cost||The cost of administration can vary depending on the complexity of the case, and the amount of work required, but it is typically higher than other insolvency procedures.|
|IP Required||Yes, an insolvency practitioner must be appointed as the administrator.|
|Directors Role||Directors can remain in control of the company during the administration process, but their powers are limited. They are required to work with the administrator to develop a restructuring plan and may be required to provide information and assistance as needed.|
Company Voluntary Arrangement
This rescue mechanism involves a structured repayment plan for creditors and must be voted into agreement.
An insolvency practitioner must arrange it, and only then, if it is deemed the company can potentially return to profitability.
Read our detailed guide to Company Voluntary Arrangments here.
|Definition||A Company Voluntary Arrangement (CVA) is a legally binding agreement between a company and its creditors to restructure and repay its debts over a fixed period of time.|
|Timeframe||Typically between 3-5 years, depending on the terms of the agreement.|
|Cost||The cost of a CVA can vary depending on the complexity of the case and the amount of work required but is typically lower than other insolvency procedures.|
|IP Required||Yes, an insolvency practitioner must be appointed as the nominee and supervisor of the CVA.|
|Directors Role||The directors remain in control of the company during the CVA process and are required to work with the IP to develop and implement the restructuring plan. They may also be required to provide regular financial updates and assist with the ongoing monitoring of the CVA.|
Alternatives to Insolvency Procedures
It’s important to take professional advice if your limited company is struggling with debt, as an experienced professional can advise on what is possible and practical, given the facts.
There are alternative options that may be available depending on the specific circumstances of the company, as follows:
- Negotiating with creditors: The company may be able to negotiate with its creditors to arrange a payment plan or reduce the amount of debt owed. This can help the company to avoid insolvency and stay in business.
- Refinancing: If the company has valuable assets or a good credit history, it may be able to refinance its debt or obtain new loans to pay off its creditors.
- Asset sale: If the company has valuable assets, it may be able to sell them to raise funds to pay off its creditors.
- Equity finance: The company may be able to raise funds by selling equity, such as shares in the company, to investors.
If you’re considering an insolvency process, here’s what we recommend.
- Use our free insolvency test tool to clarify your situation
- Don’t put your head in the sand: voluntary liquidation is generally a preferable option to being wound up by the courts
- Understand your legal obligations as director to prioritise creditor interests if the company is insolvent.
- Gather relevant financial documents before taking professional advice
- Speak with our team in confidence and with no obligation to figure your options
A company is considered insolvent if it cannot pay its debts as they fall due or if its liabilities exceed its assets.
If a company is insolvent, the directors have a duty to act in the best interests of the company’s creditors. This includes seeking professional advice, not taking on additional debts, and not disposing of the company’s assets without the consent of its creditors or a court order.
You should cease trading if you are insolvent or risk breaching several provisions of the Insolvency Act 1986 and become personally liable for debts.