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There are different types of corporate insolvency.

Insolvency is when an individual or a company does not have sufficient funds or assets to pay debts when they fall due.  There are many different types of insolvency with differing consequences.  The media are often guilty of misapplying the different insolvency descriptions and adding to the confusion that sometimes surrounds this area.

Bankruptcy is the term used to describe an individual’s insolvency. This article will, however concentrate of the different types of corporate insolvency.

"administration is effectively putting a company on a life support machine."

Types of Corporate Insolvency

The different types of insolvency which apply to companies are:-

• Liquidation
• Administration
• Receivership; and
• Company Voluntary Arrangement.

Liquidation

Liquidation is also referred to as winding up.  There are two types of liquidation:-

•  Compulsory; and

•  Voluntary

Compulsory liquidation occurs when a company is liquidated by the court following a petition by one or more of the company’s creditors.  The creditor must be able to show the court that the company is unable to pay its debts.  One of the ways of showing this is by serving a statutory demand upon the company.  If the company fails to pay the sum demanded after 3 weeks this can be used as evidence that the company cannot pay its debts.  The company must owe more than £750.

Voluntary liquidation has two forms:-

•  Members’ Voluntary Liquidation is where the directors of the company make a statutory declaration that the company is able to pay its debts for the next 12 months and the members (shareholders) of the company pass a special resolution to wind the company up; and

•  Creditors’ Voluntary Liquidation is where the directors are not willing or able to make a statutory declaration that the company can pay its debts for the next 12 months.  The process is started in the same way as a members’ voluntary liquidation which the members passing a special resolution.  The main difference is that the creditors have much more control over the process including the ability to appoint the liquidator.

The effect of all these types of liquidation is that a liquidator is appointed (whether by the court, shareholders or creditors), and will take control of the company and sell its assets to pay its creditors.  The company will cease to trade.  A way to think about liquidation in simple terms is that it effectively means that the company dies.

Administration

Following the analogy for liquidation, administration is effectively putting a company on a life support machine.  An Administrator is appointed either by the company itself or by one of its creditors or charge holders.  The Administrator takes over control of the company’s business and assets.  The main purpose of an administration is to reorganise or restructure a company or to realise the company’s assets for a higher value than in liquidation.  A company in administration may continue to trade.  To enable this to happen there is what is known as a statutory moratorium which stops creditors petitioning to liquidate the company whilst it is in administration.

Receivership

It is common for a company’s assets to be the subject of a mortgage from a lending institution such as a bank.  The lender may have a charge over a particular asset or many of the company’s assets and so be one of the company’s secured creditors.  Administrative receivership is a remedy for a secured creditor to realise the assets which are subject to the charge.  This is a contractual remedy rather than a formal insolvency process.  The Administrative receiver is only able to deal with the asset over which it has the charge.  To continue the analogy, administrative receivership is like a company being mugged of its main asset.

Company Voluntary Arrangement

This is were the company enters into an agreement with its creditors to pay them a percentage of the amount owed over a period of time.  The arrangement is supervised by an insolvency practitioner who can petition to put the company into compulsory liquidation if it fails to comply with the agreement it has made with it creditors.  Whilst the arrangement is in force there is a moratorium protecting the company from creditors issuing a winding up petition.  This allows the company to continue to trade and the directors remain in control of the company.

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