Corporate insolvency: what are the options for your business?

When a business runs into financial difficulty, understanding your options early is key to protecting your company, your creditors and your personal position as a director. Whether you’re looking to rescue, restructure or close a business, getting clear, practical advice can make a real difference to the outcome.

If you’re reading this because you need to understand the insolvency options available to your business, our insolvency solicitors can help. We’ll talk you through the choices, from restructuring plans to administration and liquidation, and work with you to find a solution that limits risk and gives you the best possible chance of recovery.

When is a company insolvent?

If you find that your business is facing financial difficulties and you are concerned it may be insolvent, you need to ask yourself the following questions:

1. Can I pay my bills when they fall due? This is known as the cash flow insolvency test. The kinds of bills you are likely to be facing are for PAYE, VAT, or national insurance, payments to suppliers, or maybe your periodic rental payments or bank loans. If your cash flow is very tight and you continuously find the company is unable to pay their creditors, it may be insolvent.
2. Do I owe more than I own? This is known as the balance sheet test. If your debts are more than the value of your assets, including cash in the bank, you are likely to be insolvent.
3. Am I facing legal action from creditors, such as county court judgements or statutory demands that I may not be able to pay? A creditor needs only be owed £750 to be able to force your company into liquidation.

If any of these scenarios apply to you, your company may be insolvent, and you should seek legal advice immediately on your options.

Whether or not your company is currently insolvent right now, if this is looking likely, you should check your loan agreements and major contracts, as often these contain terms that would trigger a default if you are technically insolvent. This can result in their terminating, or security being enforced. However, note that the CIGA Act 2020 now renders contractual clauses that purport to terminate an agreement on insolvency void.

For more information see: The Corporate Insolvency and Government Act: help or hindrance?

Corporate insolvency procedures

Insolvency procedures can be divided into two types, those that are designed to save the company from liquidation (rescue procedures), and those that are designed to realise the company’s assets and distribute them to creditors via a liquidation or winding-up.

These are the rescue procedures:

• Administration – This allows the company to protect itself from its creditors for a period of time, often to allow a buyer to be found for the viable parts of the business, or to continue trading in order to maximise the value available for creditors.
• Pre-pack sale – This procedure is part of the administration process, where a sale of the company’s business or assets is agreed prior to an administrator being appointed, and the sale takes place immediately to avoid loss of value if the company has to cease trading.
• Administrative receivership – This is where the holder of a charge over the company’s assets can ask for an administrator to be appointed to run the company and realise its assets. This procedure is being phased out now.
• Receiverships - The appointment of a Receiver is a remedy for a creditor of a company who has security of a particular asset or assets. If the security documentation allows for it, or if the court orders it, they may bring in their own Receiver to protect those assets. Typically this will be a fixed charge receiver or a law of property act receiver.
• Company voluntary arrangement or CVA – This is where the company and its creditors come to a contractual arrangement about how its debts will be handled.
• Scheme of arrangement – This is most suitable for large companies, and it involves creditors or shareholders or groups of them reaching agreement with the court as to how the company’s debts will be dealt with.

These are the liquidation and winding-up procedures:

• Compulsory liquidation – This is where a creditor owed at least £750 which remains unpaid asks the court to force a company to be wound-up, so that a liquidator can distribute its assets for the benefit of the creditors outstanding.
• Voluntary liquidation – This is where the shareholders or the creditors, knowing that the company is insolvency and cannot continue to trade, agree to wind-up the company.

A company in financial trouble may be able to reach an informal arrangement with its creditors whereby the business can repay its debts over time, rather than becoming insolvent. This is usually only effective if there are only a small number of creditors.

Rescue: administration

Administration provides a company with a brief moratorium on debts being called in against it without the administrator’s or court’s consent. The moratorium allows a business time to be rescued, to reorganise or to realise its assets and pay creditors without creditor pressure to go into liquidation.

The aim of an administration must be to either:

• Preserve the company as a going concern, or
• Achieve a better return for creditors than the winding-up of the company, or
• Realise the company’s assets and distribute the proceeds to secured or preferential creditors. 

In an administration, either the court, a company, its directors or a creditor with a floating charge (a security interest in the company’s assets) will appoint an insolvency practitioner (a specialist in insolvency), as the administrator.

To be placed into administration, the company must fail either the cash flow test or the balance sheet test, unless the application has been made by a qualifying floating charge holder who can call in their debt. 

The administrator will take over the management of the company, and they have wide-ranging powers. They will act as the company’s agent and must act in the best interests of the creditors as a whole. 

Administration may come before a CVA or liquidation, but sometimes the company is able to be rescued as a result of the administration process and will exit the administration and continue to trade again. Administration will end after one year unless an extension has been agreed. 

Further information can be found in our guide Corporate Insolvency: Administration.

Rescue: pre-pack sale

A pre-pack sale is where a company arranges with a purchaser to sell its business or assets before an administrator is appointed. Once agreement has been reached, the administrator is appointed, and the deal is completed on the same day or as soon to administration as possible.

For more information see Corporate Insolvency: Pre-pack Administration.

The moratorium procedure under CIGA 2020

Under this new Act, a company that’s in financial difficulty but that has a good chance of survival and meets the relevant criteria can get a 20 business-day moratorium from claims against the company, allowing them time to restructure or get new investment.

The company continues in existence, run by the directors, but a ‘monitor’ (an IP) is appointed to oversee the company’s business. To qualify for the moratorium, directors need to make an insolvency statement, and the monitor must state that it’s likely that a moratorium would result in the company’s rescue as a going concern.

The moratorium can be extended for an additional 20 business days, but an extension beyond this will need the consent of creditors or the court.

As long as the moratorium continues:

• Landlords can’t forfeit a lease.
• Security can’t be enforced without the court’s consent.
• Administrators can’t be appointed except by the directors.
• Goods under hire purchase can’t be repossessed.
• No legal proceedings can be started other than employment claims without the court’s consent.

Creditors will be able to challenge the actions of the directors or the monitor on grounds that their interests have been unfairly prejudiced.

For more information see: The Corporate Insolvency and Government Act: help or hindrance?

Rescue: administrative receivership

Administrative receivership allows a creditor with a floating charge over all or the majority of the assets of the company that was created before 15 September 2003 to appoint an administrative receiver to manage the company and its assets. An administrative receiver can’t be appointed if the company is in a moratorium, because, for example, administration proceedings have begun. 

The terms of a floating charge must include the right to appoint an administrative receiver, for example where the company defaults on a loan secured by the charge. The administrative receiver will be an insolvency practitioner, and their role is to run the company and sell assets if necessary. Administrative receivers’ duties are extensive, but their principal duty is to act in the best interests of the creditor. 

Administrative receivership is less common than it used to be as it does not apply to security created after 15 September 2003. A creditor with security created after this date can instead put the company into administration or use one of the other forms of receivership available, depending on the charge documentation.

Receiverships:

The appointment of a Receiver is a remedy for a creditor of a company who has security of a particular asset or assets. If the security documentation allows for it, or if the court orders it, they may bring in their own Receiver to protect those assets. Typically this will be a fixed charge receiver or a law of property act receiver.

For more information on when this might be appropriate for your company see: Corporate insolvency: Receiverships explained.

Rescue: company voluntary arrangement (CVA)

A CVA is a contractual agreement between an insolvent company and its unsecured creditors regarding the repayment of the company’s debts. It is put in place and managed by an insolvency practitioner.

The arrangement will usually cover the amount to be repaid by the company and the timescale of those repayments. Often, the company will pay a fixed monthly amount to the insolvency practitioner who will then pay the unsecured creditors according to the terms of the CVA.

A CVA is usually a fairly lengthy arrangement, three to five years is standard, and aims to provide a company in financial difficulties with breathing space in order to rethink its strategy and business plan, restructure and/or implement any other changes required to turn the business around.

A CVA can be a standalone insolvency procedure but it can also be used in conjunction with other insolvency procedures. For example, it is possible to use this process to enable a company in administration to exit administration via a CVA.

The directors can suggest a CVA if insolvency proceedings have not started, but if the company is already in administration or liquidation, it must be proposed by the existing administrator or liquidator.

Often, creditors will agree to accept less than they are owed, or to reschedule their debts in order to keep the company afloat. They will usually vote in favour of the agreement if their position is likely to be better in a CVA than in an alternative arrangement, such as liquidation. Provided that at least 75% in value of the creditors agree to the arrangement, the CVA will be binding on all unsecured creditors of the company who are owed debts covered by the CVA.

A CVA may be used in parallel with administration, where the moratorium allows the company time to agree the arrangement with its creditors.

For further information see: Corporate Insolvency: Company Voluntary Arrangements (CVAs) explained.

Rescue: scheme of arrangement

A scheme of arrangement is an agreement with the creditors or a certain class of creditors, or with shareholders (or members) or a certain class of shareholders (or members). It requires the agreement of the majority of the relevant group and must also be sanctioned by the court, after which it will bind all creditors and members whether they were aware of it or not. A scheme of arrangement does not automatically bring a moratorium preventing creditors from bringing any legal proceedings or other action against the company until the scheme is ended, but once sanctioned, creditors are bound by it.

Because schemes of arrangement are usually more complicated than CVAs and require more court time, they tend to be used in relation to larger companies. 

For more information see: Corporate insolvency: schemes of arrangement.

A scheme of arrangement may be used in parallel with an administration, where the moratorium allows the company time to agree the arrangement with its creditors.

Restructuring process under the Corporate Insolvency and Governance Act (CIGA) 2020

CIGA 2020 introduced a new restructuring procedure that’s similar to the scheme of arrangement, but with the ability for the court to impose a restructuring plan on certain types or classes of creditors, even if they’re not in agreement with it. It will also bind both secured and unsecured creditors, unlike a CVA. Both solvent and insolvent companies can propose that they enter into a restructuring procedure.

Under the new procedure, creditors will be divided into classes, depending on the type of debt they hold. They will vote on the plan by class, and at least 75% of each class will have to agree to the plan. However, even if some classes don’t agree to the plan, the court can still approve a restructuring plan if they feel it’s fair overall.

For more information see: The Corporate Insolvency and Government Act: help or hindrance?

Liquidation or winding-up

Liquidation or creditors voluntary winding up mean the same thing. They are used when the company is insolvent and result in the company ceasing to trade and eventually being dissolved. An insolvency practitioner is appointed as a liquidator, whose job is to gather the company’s assets, sell them and distribute the proceeds among the creditors to settle the company’s debts. Once this has been done, the company is dissolved. 

Liquidation can be compulsory – ie, imposed on the company by the court following an application by a creditor of the company, or voluntarily brought by a company that is insolvent. It may take place after another insolvency procedure, such as administration, has come to an end if appropriate. The liquidator has extensive powers and will take over from the directors although, in a voluntary liquidation situation, the directors may retain some authority to make decisions.

Once a winding up petition has been made to the court, the company can’t dispose of any of its assets without court approval.

A solvent company may also bring a voluntary liquidation to wind down the company in an orderly manner. This is called a members voluntary winding up.

Compulsory liquidation

A compulsory liquidation is usually brought by a creditor who presents a winding-up petition to the court because the company is unable to or will not settle its debts.

To present a winding up petition, the creditor must be owed at least £750 that has not been repaid. Following the presentation of the winding up petition, the court will then decide whether to make a winding-up order.

Read more about the compulsory liquidation process.

Voluntary liquidation

A voluntary liquidation can be instigated either by the members or the creditors. 

• Members voluntary liquidation – this can only be used by a solvent company.  The directors must give a statutory declaration of solvency stating that the company can repay all of its debts (including contingent debts) within 12 months. As a result, this form of winding-up is also known as a solvent liquidation and may be used if the corporate group needs to be reorganised, the company is no longer needed, or the members want to be repaid their investment. Once the statutory declaration is given, the members have five weeks to pass a special resolution agreeing to the winding up. The members retain control of the liquidation and so can choose the liquidator and are not required to pass much information to the creditors. 
• Creditors voluntary liquidation – if the directors cannot give a statutory declaration of solvency, the members can still pass a special resolution agreeing to the winding up of the company.  A liquidator will be appointed, who will act in the best interests of all creditors. 

How are creditors repaid?

When a company goes into administration or liquidation the creditors are repaid in a strict order as follows:

1. Secured creditors with a fixed charge or mortgage over the company’s assets
2. Expenses of the administration and liquidation 
3. Insolvency practitioner fees
4. Preferential creditors, including employees
5. Prescribed part – this is a sum capped that has to be set aside to pay unsecured creditors. It is worked out based on the value of assets covered by any floating charge
6. Secured creditors with a floating charge
7. Unsecured creditors
8. Members (shareholders) – it is extremely unusual for the members to receive anything unless it is a solvent liquidation situation.

For more information on creditor priority see: Who gets paid first in insolvency? and Corporate insolvency: a guide for creditors’ dealing with a company in financial difficulty.

Transactions that may be set aside

Where a company is insolvent, and during the period immediately before its insolvency, certain decisions made by the directors can be set aside by the court if they are deemed not to be in the best interests of the company or its creditors. These include:

Preferences

A preference is a transaction in which the company, in effect, prefers one creditor over another, by intentionally putting them in a better position than they would have been when the company goes insolvent. If the creditor happens to be connected with the company (such as a director, shadow director or an associate of a director), then the intention to prefer them is presumed.

To be classified as a preference, the transaction must have taken place no more than six months (or two years in the case of a connected person) before the insolvency proceedings began. 

Sums transferred that are considered a preference may be ordered to be repaid by the court.

Transactions at an undervalue

Where a company is insolvent and it transfers an asset for nothing, or for considerably less than the amount of its actual value, or the company becomes insolvent as a result of the transaction and within two years enters into insolvency proceedings, the transaction is deemed to be at an undervalue.

A transaction may not be deemed to be at an undervalue if there were reasonable grounds to believe that the company would benefit from the transaction, and it was entered into in good faith to carry on the business. The undervalue may be ordered to be repaid into the company for the benefit of all creditors if this occurs.

Extortionate credit transactions

Where a company enters into a transaction, the terms or payment of which are particularly unfair or high, it may be considered an extortionate credit transaction if it was entered into three years or fewer before the insolvency proceedings began, and the court may undo the transaction if it is to the benefit of all creditors.

Avoiding floating charges

A floating charge won’t be valid if it is given 12 months or less (two years or less if in favour of a connected person), before the insolvency proceedings began, if the company was unable to pay its debts at the time of creation or as a result of the relevant transaction. This will not apply if the floating charge was created in respect of new financing.

Directors of an insolvent company

Being a director of an insolvent company isn’t necessarily a negative situation, particularly if the company was a start-up or there were valid reasons for its failure. Unless a director has been disqualified or is personally bankrupt, there is nothing to stop them from becoming a director of a new company. However, in certain situations, a director of an insolvent company can be held personally liable for the debts of the company, or can be convicted of an offence or disqualified from acting as a director if they are found guilty of certain types of misconduct while acting as a director. 

• Personal liability – a director can be ordered to contribute to the insolvent company’s assets in some cases. This attempts to compensate creditors who have been adversely affected by the director’s action or inaction.
• Disqualification – a director can be disqualified from being a director of any company for between two and 15 years if the court thinks fit. Disobeying a disqualification order is a criminal offence.

Directors and anyone involved with the management of a company should be aware of and should seek legal advice as to their duties, responsibilities and potential liabilities, that are extensive.

Wrongful trading

If a company becomes insolvent, and a director knew or should have known that insolvency was likely but allowed the company to continue to trade, increasing the damage caused to creditors, a liquidator may take proceedings against that director for wrongful trading.

This could result in the director being held personally liable for the increase in credit incurred by the company during the period that the company should have ceased to trade but didn’t. A director who did everything possible to reduce the potential loss to creditors once they became aware of the impending insolvency may have a defence.

Fraudulent trading

If a liquidator or administrator considers that the company has carried on business with fraudulent intent, those involved in the fraud may be required to contribute to the company’s assets out of their personal funds. In addition, they may be disqualified from acting as a director and could face criminal penalties. 

Personal guarantees

Directors who have given personal guarantees may be held liable under them when a company is insolvent.

Breach of fiduciary duty/misfeasance

If the court considers that a director or anyone involved with the company has kept company property or money or acted in breach of their duty to act in the best interest of the company generally, they may be required to repay or account for that property or money or contribute to the company’s assets.

Similar name

A director of an insolvent company cannot be involved with a company with a similar or same name to that of the insolvent company for a period of five years following the liquidation of that company. If they do, they can become personally liable for the new company’s debts, imprisonment or a fine. 

For more information on this see: Corporate insolvency: when it is possible to use a prohibited company name?

Restrictions on suppliers

The CIGA 2020 introduced provisions designed to stop suppliers terminating or threatening to terminate contracts for their arrears where a company is either in insolvency, or subsequently enters into an insolvency procedure. This is designed to help companies that are facing financial difficulties stay in business. Suppliers will have to continue to honour their obligations under their contracts with insolvent businesses unless this causes them ‘hardship’.

Practical points

• Insolvency law and procedure is complicated and is regularly amended. We advise you to get advice from a corporate solicitor who specialises in insolvency law or an insolvency practitioner as soon as possible if you are considering insolvency procedure, or if you’re a director of a company that you think may be in financial difficulty.
• If you are a director of a company that’s in financial difficulty, hold regular board meetings to discuss and keep track of the situation. Keep proper minutes setting out the basis for commercial decisions and transactions entered into by the company, and the reasons for the board acting as it did, together with the information supplied to the directors to help them make these decisions. 
• If the company is part of a group structure and any director is on the board of two or more of the group companies, that director must bear in mind that each company is a separate legal entity. It may help to hold regular board meetings to discuss each company’s position. Again, you should take full minutes and keep all information used in making a decision. 
• Directors need to know the company’s true financial position, and make sure that they put in place clear and accurate financial reporting. Look at any covenants given in financing documents and find out what constitutes an event of default under your major contracts, loans, and leases. 
• As a director of a company in financial difficulty, don’t be tempted to resign. Walking away is unlikely to help your situation and certainly should not be undertaken without professional advice.

If your business is struggling financially, it’s important to understand your options and take action quickly. Corporate insolvency can be a complex area, but with the right advice, you can find a solution that protects your company and your position as a director. Speaking to an experienced insolvency solicitor can give you the clarity and support you need to make informed decisions and move forward with confidence.