Corporate insolvency: a quick guide
This is one of a series of quick guides, see Quick guides.
When is a company insolvent?
A company is insolvent (www.practicallaw.com/9-385-5821) if its assets are insufficient to discharge its debts and liabilities.
Often, an insolvent company:
- Is unable to pay its debts as they fall due (cash-flow insolvency).
- Has liabilities in excess of its assets (balance-sheet insolvency).
What are the risks for directors of an insolvent company?
Directors (www.practicallaw.com/9-107-6117) of insolvent companies owe their duties to the company's creditors (www.practicallaw.com/2-379-0852), not to its shareholders. Directors who are concerned about the financial position of their company must consider their actions carefully and take specialist advice (see Do's and don'ts for directors of a company on the brink of insolvency: checklist (www.practicallaw.com/0-383-8732) and Practice note, How do I give effective advice to a business in financial difficulty? (www.practicallaw.com/0-385-2695)).
- Its directors can be sued in their personal capacity for losses made by creditors if the directors continued to trade after the company had become insolvent (wrongful trading).
- The administrator or liquidator reports to the Department for Business, Enterprise and Regulatory Reform (www.practicallaw.com/2-107-6088) (BERR) on the conduct of the directors and, if appropriate, BERR will bring director disqualification proceedings.
These risks are in addition to any liability that the directors have for any breaches of duty to the company. For more information, see Practice note, Insolvency and considerations for directors (www.practicallaw.com/5-107-3984).
What are the options for an insolvent company?
In administration, a company is protected from creditors enforcing their debts while an administrator (a qualified insolvency practitioner) takes over the management of the company's trading and affairs. The administrator operates the company with a view to reorganising it, or selling some or all of its business or assets. For more detail, see Practice note, Administration (www.practicallaw.com/3-107-3975).
In some cases, a deal to sell the company's business and assets is negotiated before the administrator is appointed and completed immediately on appointment. This is called a pre-packaged administration sale or pre-pack (www.practicallaw.com/8-384-7073) (see Pre-packs in administration: a quick guide (www.practicallaw.com/7-385-0829)).
Liquidation is a procedure by which the assets of a company are placed under the control of a liquidator (a qualified insolvency practitioner). In most cases, a company in liquidation ceases to trade, and the liquidator will sell the company's assets and the distribute the proceeds to creditors. For more information, see Practice note, Liquidation (www.practicallaw.com/1-107-3981)).
Company voluntary arrangement (CVA)
A CVA (www.practicallaw.com/9-107-5957) is an agreement between a company and its creditors, by which the company compromises its debts or agrees an arrangement for their discharge. If the necessary majority of creditors approve the CVA at a creditors' meeting, then the CVA will bind all creditors (except those with security over the company's assets). For more information, see Practice note, Company voluntary arrangements (CVAs) (www.practicallaw.com/6-107-3974).
The holder of security over a company's assets may appoint a receiver to sell the assets in question and pay the proceeds to the charge-holder in satisfaction of the secured debt.
- How to identify a company in financial difficulty (www.practicallaw.com/9-385-3638).
- What are the warning signs of financial difficulty in a company's accounts? (www.practicallaw.com/9-385-3544).
- Creditors of companies in financial difficulty or insolvency: top 10 FAQ's (www.practicallaw.com/3-385-2694).
- Overview of company insolvency procedures (www.practicallaw.com/0-201-8404).
- Corporate insolvency: a guide (www.practicallaw.com/8-107-3973).
- Restructuring and insolvency jargon buster (www.practicallaw.com/5-384-3892).
- Administration (www.practicallaw.com/3-107-3975).
- Liquidation (www.practicallaw.com/1-107-3981).
- Company voluntary arrangements (CVAs) (www.practicallaw.com/6-107-3974).
- Administrative receivership (www.practicallaw.com/1-107-3976).
- Insolvency and considerations for directors (www.practicallaw.com/5-107-3984).
- Buying the business and assets of an insolvent company (www.practicallaw.com/9-100-1853).
- Litigation and insolvency: claiming against an insolvent defendant (www.practicallaw.com/1-384-0980).