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What Is Company Insolvency in the UK?

Written by John A Waller Reviewed April 20th,2023.

What is company insolvency in the UK? A limited company remains insolvent when it cannot pay its debts (creditors) and other company liabilities as and when they are due to be paid and therefore, experiencing financial distress. Within the UK, Insolvency laws in England and Wales form the basis of UK Insolvency.

Three Insolvency tests adopted to determine limited company insolvency:

‘Cash-flow test’: This test determines if the company cannot pay it’s creditors and other liabilities as and when they fall due.
‘Balance sheet test’: When liabilities exceed assets of the company. Then the company is deemed insolvent having taken into account potential liabilities not yet accounted.
‘Legal action test: Linked to the Cash Flow Test. If your company faces legal action it can’t afford, then it may be deemed Insolvent.

So, should your limited company fall into one of the above tests, if not both? Therefore, as a director, you need to take immediate advice to protect the company’s creditors.

Usual Warning Symptoms Of Corporate Insolvencies:

  • Overtrading;
  • HMRC arrears accumulating;
  • Large notable bad debts;
  • Ageing debtor ledger;
  • Bank overdraft maxed;
  • High team member migration;
  • Creditor pressure to pay;
  • Threats of legal action;
  • Applications for borrowing refused;
  • Directors not paying themselves;
  • County court claims.
  • Companys finances out of control.

As a company director, you must be aware of all of the above symptoms. Awareness will help you prevent company insolvency or decrease the consequences for you and your company.

Please read our webpage on Directors Duties and Responsibilities.

What are my companies Options when Facing Company Insolvency?

Finding your limited company, insolvent, open up your company to either being closed down or having too close down. However, options exist using a Licensed Insolvency Practitioner to either rescue a viable company or close an insolvent one.
Failing to act once you realise your company remains insolvent.  Can hold you liable for its debts if you continue to trade.
Obtain Assistance From Insolvency Expert or a Licensed Insolvency Practitioner.
Company insolvency remains a complicated process in the UK. All is not what it seems. When considering the viability of your limited company, many critical legal aspects need consideration. Therefore speak to someone who has qualified experience in UK insolvency. Those you may turn to are:

However, only a licensed insolvency practitioner may act to preserve the business while protecting the companies creditors.
Licensed Insolvency Practitioners remain officers of the court. As such, they remain licensed to write company debt off legally.

Please call HBG Advisory on 0330 056 3120 if you wish to discuss any areas of concern.

Company directors options are:

UK Company Types of Insolvency procedures?

A limited company can be placed into a formal insolvency process by its directors, shareholders, creditors or the court. How actioned though depends on each case’s facts and the process used? Various UK corporate insolvency procedures exist through licensed insolvency practitioner (IP).

Once a company has appointed an administrator, the company is in a rescue process designed to benefit the creditors and rescue the company. The company’s business assets remain protected by a statutory ‘moratorium’, or stoppage, of any creditor action forms. Administrators may continue to trade (Trading Administration) while advertising the business for sale.

The criteria for a company to, therefore, enter administration is:

  • The greater realisation of asset value;
  • Protection of jobs.

Company Administrations remain often linked with ‘pre-pack administration‘.

Administrative Receivers remain appointed by a floating charge holder, registered on the company before September 15th, 2003. The receiver-manager is required upon appointment to sell assets of the company to repay secured debt. Usually, floating charge holders are financial institutions such as banks in the UK.

However, the introduction of company administrations has replaced Receiverships.

Note: appointed ‘Administrative receivers’ are not authorised to pay ‘Unsecured Creditors’ of the company. Often companies fall into liquidation, and the liquidator then deals with them. However, if the company then enters Administration after Receivership, the administrator may deal with the Unsecured Creditors with court approval.

A company voluntary arrangement (CVA) is a rescue procedure designed to allow a limited company, to pay company creditors by paying a percentage to creditors. Therefore, a legally binding agreement that is regulated. Supporting a CVA, creditors will have agreed to a decreased or rescheduled payment agreement. The intent is to ensure the survival of a viable limited company. CVAs often used when a Company Administration process is in place.

  • Scheme of Arrangement & Company Insolvency

Similar to a CVA but needs a court to sanction. The procedure is more complicated than a CVA and often adopted by larger companies.

The licensed insolvency practitioner oversees the scheme of arrangement. Commencing with negotiating the ‘debt comprise’ for the creditor scheme of arrangement proposal.

The court approves meetings to convene and ensure creditor classes are correct.

75% member approval of a class of creditors is needed for the scheme, and a special resolution is required if the arrangement scheme compromises its share capital.

Once the creditor class’s approval is gained, the court can sanction the arrangement scheme at a hearing.  The court then requires that all statutory needs are upheld, and classes of creditors are accurately classified while acting in the class’s interest. A creditor approving such a scheme was reasonable based on the financial information provided. Once sanctioned by the court, it legally bound the creditors and filed at companies house showing the scheme in operation.

A liquidation closes a solvent and insolvent company for good. The appointed liquidator realises the company’s assets and collects all more monies owed to the company. Then, makes all staff and directors redundant. Once actioned, the company then removed from the registrar at companies house. The liquidator appointed then required to examine the former directors’ behaviour and take action if relevant.

Once a limited company enters either, administration or liquidation. Then creditors remain paid in the following order of priority depending on the amount of money available for distribution:

  1. Secured creditors’ (fixed charge realisations);
  2. Costs of liquidation or administration;
  3. Insolvency Practitioners’ fees;
  4. preferential creditors’ claims;
  5. prescribed part;
  6. secured creditors;
  7. unsecured creditors’ claims;
  8. The companies shareholders.

Prescribed Part

The ‘prescribed part‘ is the amount the appointed liquidator or administrator holds to distribute to unsecured creditors of the company. Measured as a proportion of the number of assets subject to any floating charge registered after September 15th, 2003. The fund capacity depends on the assets’ value, though maybe up to £600,000.

You must move fast if you believe your company is insolvent. Request advise from professional services to ensure awareness of available options. A director must deal with any issue relating to company insolvency.

Cosequenesequences for company directors with failed companies

Directors disqualification. The Company Directors Disqualification Act 1986 constitutes part of UK company law while setting out the methods for company directors under English Law to be disqualified if found to have threatened the public interest while directing a corporate company registered at companies house.

Examples for disqualification:

  • fraudulent trading;
  • Misfeasance;
  • Directors misconduct
  • Trading while insolvent.
  • Failing to pay the tax owed by the company deliberately;
  • The use of company money or assets for personal benefit;
  • Not maintaining proper company accounting records.

If anxious regarding company insolvency? Please then do not hesitate to speak confidentially to one of or team members FREE of charge today.

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