Types of Insolvency
The Insolvency Service exists to provide the framework and the means for dealing with financial failure in the economy and with the misconduct that is often associated with it.
This can only apply to individuals (including sole traders and individual members of a partnership). Bankruptcy petitions may be presented to the court by the individual, by creditors who are owed £750 or more, or by the supervisor of an individual voluntary arrangement. A bankruptcy order is made by the court.
Individual Voluntary Arrangement (IVA)
An individual comes to an arrangement with creditors to pay his/her debts in full or in part over time as an alternative to bankruptcy.
The arrangement is set up by a licensed Insolvency Practitioner who will put it to a meeting of creditors. If the proposal is accepted at the meeting, the agreement reached with the creditors will be legally binding.
An Interim Order is sometimes issued by a court and will immediately protect the debtor from any legal action by creditors.
Company Voluntary Arrangement (CVA)
A company comes to an arrangement with its creditors to pay the debts in full or in part over time.
A CVA begins with the company (or its adviser) drafting a formal proposal at a Creditors' Meeting to pay part or all of the debts. If the proposal is accepted by the creditors, the arrangement will become legally binding and the directors will retain control of the company.
This is the winding up of a company or a partnership by a court order (a winding up order). A petition is normally presented to the court by a creditor stating that he or she is owed a sum of money by the company and that the company cannot pay.
The Official Receiver becomes liquidator when the order is made but an Insolvency Practitioner will be appointed to take over if the company has significant assets. The liquidator's role is to realise the company's assets, pay all the fees and charges arising from the liquidation, and pay the creditors as far as funds allow in a strict order of priority.
Creditors' Voluntary Liquidation
Here the shareholders pass a resolution to wind the company up without the need for a court order.
A Creditors' Meeting is held to nominate the appointment of a liquidator and consider a statement of affairs. Creditors can appoint a committee to work with the liquidator, whose role is to realise the company's assets, pay all the fees and charges arising from the liquidation, and pay the creditors as far as funds allow in a strict order of priority.
Administration applies to limited companies and partnerships and is intended to get the company out of trouble and trading again if possible.
Administrators can be appointed to a company that is unable, or is likely to become unable, to pay its debts. They can be appointed by the courts (on application from a creditor, directors or partners), the holder of a qualifying floating charge over the assets of the business, or the company or its directors.
An administrator's primary goal is to rescue the company as a going concern. If this isn't possible, the administrator will try to get a better result for the creditors than would be possible if the company was wound up. If neither of these is possible, the administrator will sell the company's property to make at least a partial payment to one or more secured or preferential creditors, such as employees or the bank.