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A-Z of insolvency & business rescue

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Administration

A legal process through which a company in financial difficulties can carry on trading by protecting itself from creditors, refinancing and restructuring. It may also lead to the company ceasing to trade. A company in administration is run by the administrator.

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Administrator

The person – or people – who takes charge of a company in administration, running day-to-day affairs and seeking to find solutions for its financial ills. They must act in the interest of all the creditors and also represent the company in court.

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Companies House

Companies House, a government agency, is the UK’s register of companies. It keeps detailed records of all companies registered in the UK, including directors, relevant addresses and details of incorporation. Companies are required by law to submit their annual financial statements to Companies House, and are legally obliged to inform it of any changes to their circumstances. For more information, click here

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A Company Voluntary Arrangement (CVA)

A ‘CVA’ is a negotiated settlement between a company in debt and its creditors, overseen by a licensed insolvency practitioner (IP). Once the IP has ascertained the assets the distressed company has, an offer will be made to creditors, typically a percentage of the debt owed (expressed as X in the £1). If 75% of creditors (by amount owed) agree the repayment scheme it is voted through and becomes legally binding on all creditors.

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The creditors’ meeting

A company looking to put a Company Voluntary Arrangement (CVA) in place is obliged to call a creditors’ meeting. This takes place after a plan to pay off debt is put in place, with the help of a licensed IP, and filed to court. Creditors can ask questions about the plan, and at the end of the meeting vote on whether it is acceptable or not.

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Creditors Voluntary Liquidation (CVL)

A CVL is an insolvency mechanism through which directors of an insolvent company voluntarily make a decision to close the business. Company directors/owners usually go for this option when it is clear the company is not viable and cannot be saved. A CVL ensures no further debt is accrued, relieving those involved of the stress of running a failing business.

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Declaration of Solvency

This must be signed by company directors/owners wanting to close their company through a Members Voluntary Liquidation. It confirms the company can pay all its taxes due (including PAYE, NIC, VAT and Corporation Tax, etc.); can pay all its creditors; and can meet all its contractual obligations.

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Director’s responsibilities/fiduciary duties

A director has a responsibility to always act in good faith regarding the company and its stakeholders (suppliers, partners, staff, HMRC, etc,). In the case of insolvency, these ‘fiduciary duties’ include not putting their personal interests ahead of the company’s or its creditors (and other stakeholders).

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The Gazette

The Gazette, published each weekday, is an official record of government. It includes notices for corporate and personal insolvencies. See https://www.thegazette.co.uk/

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An Individual Voluntary Arrangement (IVA)

An ‘IVA’ works in the same way as a CVA, but is designed for individuals rather than companies.

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Insolvency

A company or individual is insolvent if it/they cannot pay their debts. Insolvent entities have two main options: to negotiate a settlement with creditors through a voluntary arrangement with the aim of avoiding bankruptcy; or enter bankruptcy.

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The Insolvency Service (IS)

The IS website describes itself as “a government agency that helps to deliver economic confidence by supporting those in financial distress, tackling financial wrongdoing and maximising returns to creditors”. For more information, click here

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Licensed insolvency practitioner (IP) in a voluntary arrangement

Person appointed by a company in financial distress. Their role is to assess the company’s assets, and get creditors to agree a settlement of debt owed. They will also offer advice on how the company can avoid bankruptcy and so carry on trading. Additionally, they will check that the company directors have acted in good faith and within the law.

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Licensed insolvency practitioner (IP) for an insolvent company

Person appointed by a company in financial distress. Their role is to assess the company’s assets, and get creditors to agree a settlement of debt owed. They will also offer advice on how the company can avoid bankruptcy and so carry on trading. Additionally, they will check that the company directors have acted in good faith and within the law.

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Members Voluntary Liquidation (MVL)

An MVL is a way of formally closing down a solvent company. It is not available to companies in financial distress that are unable to pay their debts. Directors of companies that go down the MVL route have to sign a ‘Declaration of Solvency’ (which is exactly as it sounds). Many business owners wanting to retire or change career go down this route.

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The nominee/nominee’s report/supervisor

A nominee, usually an insolvency practitioner, assists directors with the preparation of their Company Voluntary Arrangement (CVA). Once the CVA is approved, the nominee assumes the role of supervisor and oversees the implementation of the CVA. As part of their role, the nominee/supervisor will consider whether a CVA is appropriate, prepare the nominee’s report stating why the proposal should be accepted, and set up the creditors’ meeting.

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Passing off

A director or directors cannot close a business via insolvency and then trade in the same market with a new company with a similar name as the defunct one.

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Phoenix company

A phoenix company is so called because it comes from the ashes of a defunct one. Here the directors of the old business buy the assets of the insolvent one. They can operate in the same sector, from the same premises and with the same staff as the previous entity. What they can’t do is use insolvency to avoid paying creditors, a practice commonly known as ‘phoenixing’.

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Preferential creditors

Preferential creditors can include staff who are owed pay (and possibly other benefits). Under the Finance Act 2020, HMRC will regain its status as a preferential creditor for insolvencies that commence on or after 1 December 2020.

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Preferential treatment

A director cannot give one creditor preferential treatment over another. All must be treated fairly and equally.

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Pre-pack administration

A pre-pack administration is an insolvency procedure where a company enters into an agreement to sell its assets to a buyer, before appointing administrators to help with the sale. It is most often utilised when a company is fundamentally sound. ‘Pre packs’ are a good way to sell the business onto a competitor or third party. Often the company is sold back to the existing directors, then operated under a new company name (a ‘newco’).

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Secured creditors

A secured creditor – usually a bank or other asset-based lender – holds a ‘charge’ over a company’s asset or assets. If the company becomes insolvent, sale of this specific asset(s) provides repayment of the debt. Effectively, secured creditors are at the front of the queue to have their debt repaid.

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Tests for insolvency

There are two common ways of determining whether a company is solvents: the cash flow test and the balance sheet test. • The cash flow test looks at whether a company can pay its debts when they are due, including staff wages, taxes to HMRC, suppliers’ bills, and so on. Cash flow problems can cause payments to be missed, leading to quickly mounting debt problems. • The balance sheet test weighs up all the company’s assets (stock, plant and machinery, monies owed, property, cash in the bank, etc) against its debts. If the latter outweighs the former, then the company is technically insolvent.

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Trading while insolvent

Company directors who allow their company to trade while knowing it is insolvent are committing an offence. This could lead to them becoming personally responsible for the debt for ‘wrongful trading’ (a civil offence). More serious cases are considered ‘fraudulent trading’, which is a criminal offence.

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Unsecured creditors

Unsecured creditors can include suppliers, customers, HMRC (until December 2020) and contractors. They rank after secured and preferential creditors in an insolvency situation.

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Winding up petition

Anyone can apply to the court to close, or ‘wind up’, a company if it cannot pay its debts. To wind up a company the creditor must be owed £750 or more and be able to prove that the company cannot pay the debt. This is known as compulsory liquidation.

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