Harper James is a UK full-service commercial law firm advising ambitious businesses on insolvency, restructuring and related commercial matters under the laws of England and Wales. Insolvency is the legal and financial position that arises when a company cannot pay its debts as they fall due or has liabilities greater than the value of its assets.
The two main tests are the cash-flow test and the balance-sheet test. A company fails the cash-flow test when it cannot pay debts at the required time. It fails the balance-sheet test when its liabilities exceed its assets, taking future and contingent liabilities into account. Directors must monitor the company’s financial position, protect creditors’ interests when insolvency is probable, and avoid transactions that unfairly favour particular creditors.
Early action allows the company to assess restructuring options. These include negotiating payment arrangements, refinancing, selling assets, or proposing a Company Voluntary Arrangement (CVA). A CVA is an agreement with creditors to repay some or all of the company’s debts over an agreed period. The company’s directors generally remain responsible for running the business, while an insolvency practitioner may act as the nominee and, if the CVA is approved, as its supervisor.
Administration places the company’s affairs under the control of an administrator. The administrator’s statutory objectives include rescuing the company as a going concern, achieving a better result for creditors than an immediate liquidation, or realising assets for secured or preferential creditors. An administration generally provides a moratorium that restricts creditor enforcement while the administrator assesses the business.
Liquidation brings the company’s activities to an end, although a business or its assets may be sold as part of the process. In a creditors’ voluntary liquidation, the directors propose liquidation because the company cannot pay its debts, and a liquidator is appointed to deal with the company’s assets and claims. A compulsory liquidation follows a winding-up order from the court, commonly after a creditor serves a statutory demand and presents a winding-up petition.
The process normally involves reviewing the company’s accounts, creditor claims, security documents, contracts, employees, tax position and recent transactions. The appropriate procedure depends on the company’s financial position, its prospects and the interests of its creditors. Directors may take advice from legal and financial advisers, while an insolvency practitioner’s role varies according to the procedure. For example, an insolvency practitioner may act as a CVA nominee or supervisor, an administrator, or a liquidator. Directors usually retain day-to-day control in a CVA, whereas an administrator or liquidator takes control of the relevant company affairs in the procedure for which they are appointed.
Creditors receive notices and information about meetings, claims and distributions. Directors must provide accurate records and cooperate with the relevant office-holder. Unlawful dividends, preferences, transactions at undervalue and wrongful trading are among the matters examined during an insolvency investigation. The procedure ends when the company is rescued, dissolved, or removed from the register, or when the administrator completes the administration and distributes available funds.