By Ian Coupland, Director and Head of Commercial & Litigation at Lewis Nedas Law

COVID-19 is a human tragedy and the impact is being felt by businesses and economies around the world.  We are all bracing ourselves for the challenges that lie ahead. Below I have attempted to answer some of the questions which I am being frequently asked by concerned clients.

DIFFERENT TYPES OF INSOLVENCY

Insolvency is often looked on as purely a method of debt collection, but there is so much more to it.

STARTING WITH LIQUIDATION

Q. What is it?

• a creditor can apply to Court to Petition to Wind Up a Company known as a Compulsory Liquidation, or the shareholders pass a resolution to wind the company up without the need for a court order known as a Creditors’ Voluntary Liquidation.

Q. What then happens?

• In either case a Liquidator is appointed to realise the company’s assets, pay all the fees and charges arising from the liquidation, and pay the creditors as far as funds allow in a strict order of priority. The Liquidator will be either the Official Receiver or an Insolvency Practitioner appointed by the creditors. Creditors can appoint a committee to work with the Liquidator.
• The Liquidator will look at the circumstances which resulted in the Liquidation to see if any fault can be laid at the door of the Directors for fraudulent or wrongful trading which may result in personal action against them, or to recover monies received when the Company was not making a profit which are classed as a Directors loan rather than Dividends.
• The Liquidator in all cases has to prepared and file a report with The Insolvency Service which may result in the Directors Disqualification Proceedings.

Q. What are Director Disqualification Proceedings?

• The classic case is where the only creditor is the taxman and the Director has preferred to pay themselves first. The period of disqualification can be up to 15 years depending on the severity of the conduct. If a Director becomes a Director of another Company whilst Disqualified, then they commit a criminal offence which could result in imprisonment.
• However, there is a process to ask the Court for permission to be a Directors of a specific Company during this period. It’s not straight forward and the Insolvency Service have set out criteria which they want satisfying.

Q. Can the proposed Liquidation be challenged?

• If the Company does not believe the debt is genuine (and is at least for £750) it can apply to dismiss the Petition on the basis that the dispute should be litigated in the County Court.
• This can also include an application for an Injunction to prevent the Petition being advertised, which it has to be done in the London Gazette at least 10 days before the hearing, as once advertised Banks will freeze bank accounts etc. It is often after service of a Winding-up Petition and before its advertising that settlements are reached between the creditor and debtor.

BANKRUPTCY

Q. What is it?

• This can only apply to individuals (including sole traders and individual members of a partnership).
• Bankruptcy petitions may be presented to the court by creditors who are owed at least £5,000 or by the individual his or herself.
• A bankruptcy order is made by the court.
• If a creditor takes this action, then as a preliminary step a Statutory Demand has to be served to allow the debtor 21 days to pay.

Q. Can the proposed Bankruptcy be challenged?

• If the debtor does not believe the debt to be genuine and that the dispute should be litigated in the County Court, then that person can within 18 days of service of the Statutory Demand apply to Court to set it aside which if successful will mean that the Bankruptcy Petition cannot be presented.

Q. What is the effect of being made Bankrupt?

• The Bankruptcy normally lasts for a year and during that time the bankrupt cannot be a Director of a Company. The Bankrupt’s Trustee in Bankruptcy will be either the Official Receiver or an Insolvency Practitioner appointed by the creditors.
• The Bankrupt has to provide full disclosure as all the Bankrupt’s assets as at the date of the Bankruptcy Order go into the Bankrupt’s Estate to pay off that persons’ Creditors.
• Once the Bankrupt is discharged he cannot be chased for any pre-bankrupt debts.

But what if it is simply a cash flow issue and time is required for restructuring? – there are various options:

INDIVIDUAL VOLUNTARY ARRANGEMENT (IVA)

Q. What is it?

• This is where an individual comes to an arrangement with that person’s creditors to pay his/her debts in full or in part over time as an alternative to bankruptcy.
• The arrangement is set up by a licensed Insolvency Practitioner who will put the proposal to a meeting of creditors.

Q. How does it work?

• 75% in value of that person’s creditors who can and do vote have to approve it.
• If the proposal is accepted at the meeting, the agreement reached with the creditors will be legally binding on all creditors, even those who do not agree to it.

Q. Is there any other benefit to do this?

• An Interim Order is sometimes issued by a court and will immediately protect the debtor from any legal action by creditors.

COMPANY VOLUNTARY ARRANGEMENT (CVA)

Q. What is it?

• In this situation, a company comes to an arrangement with its creditors to pay the debts in full or in part over time.

Q. How does it work?

• A CVA begins with the company (or its adviser) drafting a formal proposal to be considered at a Creditors’ Meeting to pay part or all of the debts.
• Again 75% approval is required and a licensed Insolvency Practitioner has to both approve the proposal in their capacity as Nominee and Supervise the Arrangement. The Proposal is filed at Court and a meeting of creditors is arranged.
• If the proposal is accepted by the creditors, the arrangement will become legally binding and the directors will retain control of the company.

Q. Are there any differences from an IVA?

• Unlike an IVA, there no right to obtain an Interim Order during the CVA process, for example to halt a Winding Up Petition, in which case a CVA is often used along with an Administration

ADMINISTRATION

Q. What it’s purpose?

• This applies to limited companies and partnerships and is intended to get the company/partnership out of trouble and trading again if possible.
• As soon as an Administration Petition is filed and issued at Court then just like with an Interim Order in an IVA situation, this will immediately protect the company from any legal action by creditors.

Q. How does it work?

• Administrators, who again are licensed Insolvency Practitioner, can be appointed to a company/partnership that is unable or is likely to become unable, to pay its debts. They can be appointed by the courts (on application from a creditor, directors or partners), the holder of a qualifying floating charge over the assets of the business, or the company or its directors.
• An administrator’s primary goal is to rescue the company as a going concern. If this isn’t possible, the administrator will try to get a better result for the creditors than would be possible if the company was wound up.
• If neither of these is possible, the administrator will sell the company’s property to make at least a partial payment to one or more secured or preferential creditors, such as employees or the bank.

CONTACT IAN COUPLAND AT LEWIS NEDAS

He has over 30 years’ experience in dealing with all aspects of Business and Commercial Law, Employment, Insolvency, Litigation and Regulatory Law having qualified in 1988.

He is a member of the Insolvency Lawyers Association and regularly advises clients on Insolvency and Restructuring scenarios and acts for Insolvency Practitioners.

Ian can be contacted on 020 7387 2032.