Insolvency Act 1986
Insolvency Act 1986
There are four main procedures available to companies facing insolvency. These are administration, company voluntary arrangement, administrative receivership, and liquidation. As liquidation consists of the winding up of a company, the rescue procedures available to companies are administration, company voluntary arrangement and administrative receivership.
During administration procedure the company continues to be able to trade and a statutory moratorium comes into effect at the commencement of the proceedings. This means that the company is temporarily released from the duty of paying its creditors and, thus, gives the company time to recover from its financial difficulties. Administration procedures can be opened by the court. Either the company or the creditors can apply for the commencement of the proceedings. Administration requires that the debtor is insolvent, or about to become insolvent, and that it is reasonable to assume that the proceedings will result in one of the following situations:
- the company is able to continue operating as a going concern,
- a better result will be attained for the creditors than would have been possibly without administration, or
- if option 1 and 2 are not possible, the proceeds from the sale of the company's assets will be distributed amongst the creditors.
An administrator is appointed by the court to manage the process. The administrators have a number of powers set out under Part Three of the Insolvency Act 2016. Most significantly these powers allow administrators to dismiss employees (including also managers and directors), close parts or all of the business, negotiate the sale of the business, and put forward restructuring plans to creditors. Administration is limited to a period of one year, however, there is a possibility of extending the procedures after that.
Company voluntary arrangement (CVA) aims at arriving at a compromise between the company and its creditors as to the repayment of the owed debt. The company directors can initiate the procedure, or if the company is already in the midst of either administration or liquidation, the administrator/liquidator can initiate the procedure. There are no preconditions associated with CVA, therefore, the company is not required to show that it is insolvent for the proceedings to commence. A proposed arrangement will be drawn up and this is then subject to approval from the creditors. An approval rate of 75% is required for the proposal to be accepted. If the proposal is approved, it is binding for all creditors. A moratorium is not included in CVA, except for small companies. There is not set time limit on CVA proceedings.
Administrative receivership is used for selling the company's assets and distributing the proceeds to the creditors, thereby, ensuring the repayment of the creditors' claims. The proceedings are not subject to approval by the court. An administrative receiver is appointed and given control of the company. The receiver's main duty is towards the creditors and in realising their interests. Administrative receivership does not include moratorium and there is no set time limit for the proceedings, however, they are generally carried out rather quickly. Administrative receivership is not used very often, as the situations in which it can be initiated are very limited.
Government statistics record the numbers of companies entering administration and these are reported on a quarterly basis.
in Q2 2019, there were 4,321 total underlying company insolvencies; this figure is 2.6% higher than in Q1 2019. Compared to Q2 2018, this represents an increase of 11.9%. This is the highest underlying level of insolvencies in any quarter since Q1 2014. 400 administrations took place in Q2 2019, the second highest quarterly level since Q1 2014 and a decrease of 11.4% compared to Q1 2019.
In Q2 2017 show that just over 4,500 companies entered insolvency in Q2. The timeline shows that the number of insolvencies is lower than the recent peak of over 6,000 in 2008/2009 though the latest data indicate a slight increase on the figures for 2015/2016. The well-established trend is that creditors' voluntary liquidations comprise the majority of insolvencies; 76% of all insolvencies for Q2 2017. The government data only record when a company enters insolvency. The data are not designed to make an assessment of the three rescue options, as these outcomes are not recorded.
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