Company Insolvency Procedures Explained

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Company Insolvency Procedures

The main company insolvency procedures:

Administration
Creditors' Voluntary Liquidation (CVL)
Winding Up
Members’ Voluntarily Liquidation (MVL)
Receivership
Company Voluntary Arrangement (CVA)
Liquidation

Administration

Administration is the procedure when an insolvency practitioner is appointed as administrator and takes over the running of the company. The administrators replace the existing company directors. The main objective with a company administration is to keep the company trading as a going concern and maximizing payments to creditors.

Administration v Receivership

‘Administration’ and ‘Receivership’ are often confused. The key differences are as follows:

With administration an insolvency practitioner is appointed to take over control of the company’s operations. When the company enters administration, the company gains some protection against creditors. The administrator will work to establish whether there is a way for the company to satisfy its creditors and, if successful, the company can continue trading.

With receivership a creditor with a specific type of secured loan is able to enforce a contractual right to appoint a receiver to recover amounts owed. The receiver's obligation is to the secured creditor, so liquidation is most likely. Efforts to keep the company trading will only be pursued if it represents the best chance of repaying the debt.

Creditors' Voluntary Liquidation

A creditors' voluntary liquidation is an insolvency procedure when the directors of an insolvent company take the decision to go into liquidation voluntarily and wind up the company.

When the directors cannot see any way to turn the company around, liquidation may the only option. If the company cannot pay debts and invoices are being unpaid, the directors cannot continue trading as they would risk being charged with wrongful trading if the company was later forced into liquidation by a creditor and was found to have continued trading while insolvent. When the directors of a company take the decision to wind up the company, this is a creditors’ voluntary liquidation. The directors can make the choice of insolvency practitioner to handle the liquidation and payments to creditors.

Read more about Creditors' Voluntary Liquidation.

Winding Up

The winding up process starts with a winding up petition presented to the courts. If the court rules that the company should be wound up it gives a winding up order.

A winding up order puts the company into compulsory liquidation.

Members’ Voluntarily Liquidation

This is a procedure that differs from other liquidation procedures because a members’ voluntarily liquidation is used when the company is not in financial difficulty, but the owners do not wish to continue running the business. In this liquidation the company is solvent and can pay all its debts and an insolvency practitioner manages the closure of the company.

Read more about Members’ Voluntary Liquidation.

Receivership

Rarely used nowadays, receivership is also known as administrative receivership. This is a procedure which is only applied when a company is in default of a debenture loan agreement created prior to 15 September 2003. The loan agreement would include provision for the lender to appoint a receiver to take over the company and take whatever actions they consider in the best interests of the lender to recover as much of the debt as possible. This is a different procedure to administration.

Company Voluntary Arrangement

A company voluntary arrangement (CVA) is usually used when a company is heading towards financial difficulty and wants to pre-empt insolvency. A company in a company voluntary arrangement is usually still solvent, and the company directors will invite an insolvency practitioner to work with them to reach agreements with creditors and avoid the prospect of insolvency and liquidation.

Read more about Company Voluntary Arrangements.

Liquidation

Liquidation can be the final stage of other insolvency procedures. Both insolvent and solvent companies can be liquidated. Liquidation is the process by which the assets of a company are realized, and the proceeds redistributed. Liquidation can be either voluntary or compulsory.