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What happens in Insolvency Litigation?

The current global economy's instability means that individuals and organisations have to be aware of insolvency procedures in relation to either their own business or the people that they deal with (including customers, clients and suppliers). Insolvency occurs when a business is no longer able to pay its creditors any debts when they are due. In this situation, the creditors will try to recover what is owed to them by starting court action. This can result in the company being wound up (ending all business affairs) and having its assets liquidated (sold off) to cover its debts. An insolvency practitioner is generally appointed to oversee the whole process. The purpose of insolvency proceedings is to produce the best possible outcome for the creditors that have amounts owing to them. However, there are also some measures that can be taken to protect the directors and shareholders of an insolvent company.

Types of insolvency

A company will be considered insolvent in the following situations:

  • It cannot meet its current or future debts of liabilities; or,
  • Its total value of debts and liabilities is greater than its total asset value.

Where a company is deemed insolvent, there are three main routes for winding up the company and liquidating its assets:

  1. A court order.
  2. Creditors' Voluntary Liquidation, where the shareholders pass a resolution for voluntary winding up.
  3. Creditor's petition to have a company wound up. This occurs where a creditor formally demands an amount over £750 and this is not repaid within 3 weeks or the court orders the payment of a debt and this remains outstanding.

The preferred route to satisfy outstanding claims is to do this while trying to save the insolvent company. There are three main routes for insolvency: administration, liquidation and Company Voluntary Arrangement (CVA).

Administration

In an administration, the directors surrender control of the company to administrators who are external to the company. It is only possible for the court, insolvent company or a Qualifying Floating Charge Holder, to put a company into administration. The main aims of this process are to either rescue the company, rescue property from the insolvent company or achieve a better result for the creditors. During administration, the company can sell its assets or continue to operate. In order to make funds available, the insolvent company can also be sold as a going concern while in administration.

Creditors are then paid in the following order:

  • Secured creditors.
  • Preferential creditors.
  • Unsecured creditors.
  • Shareholders and members.

Liquidation

This can be either voluntary or compulsory. A creditor is able to petition for the insolvent company to be wound up. Liquidation involves the selling of company’s assets to raise money to be distributed between the creditors. It is also possible for the company's shareholders to pass a resolution for voluntary winding up.

A liquidator is appointed and has wide-ranging powers to investigate the affairs of the company. Where necessary, the liquidator can bring legal claims to benefit the creditor. They must review the director's conduct and submit a report on its finding to the Insolvency Service.

Company Voluntary Arrangement (CVA)

A Company Voluntary Arrangement (CVA) allows the creditors to agree a payment plan - to either reduce or delay the repayment of their debt - in order for the company to continue operating. Generally, CVAs are used where the company is expecting a payment in the near future that will reverse the issue of insolvency. An insolvency practitioner needs to be appointed to draw up a formal proposal.

Matters to consider in an insolvency

During the insolvency process, it is possible for the liquidation practitioner to determine that certain transactions are to be reversed. To be reversible, the following must apply:

  • The transactions must have been commenced within two years before the proceedings were started.
  • The company must have been insolvent.
  • The asset was sold for less than the market value.

There are limitation periods for creditors raising a claim. For a statutory claim including a debt, the claim has to be made within six years of the date of default. However, the statutory period ceases to run in the following circumstances:

  • Where the business has entered voluntary liquidation;
  • If the company has been judicially ordered to be wound up; or,
  • Where an individual creditor has submitted a petition for winding up then the statute will cease to run for their claim (though it will continue for other creditors who have not made an order).

The directors must ensure that the creditor's interests are ahead of anyone else, including shareholders. The directors are also compelled to cooperate with the appointed liquidator and must provide information and accounts to the liquidator, as well as authorise the transfer of assets to the liquidator.

Contact our Insolvency Litigation Solicitors London, UK

If a company cannot survive insolvency proceedings intact, it can cause significant financial consequences for shareholders as well as a growing uncertainty among employees and directors. Furthermore, liquidation will mean the end of the company and any hard-fought brand image and market presence with it. As a result, it is important that best efforts are taken to preserve the integrity of the company and, if not possible, safeguard the interests of all three groups.

Lewis Nedas Law holds over 25 years of corporate litigation experience with both domestic and international clients in a broad range of matters, including insolvency proceedings. The firm has advised company directors in insolvency as to their duties and responsibilities, and how to avoid incurred personal liability or criminal sanction as a result of wrongful trading in liquidation.

For expert advice from our Dispute Resolution Solicitors, please call us on 02073872032 or complete our online enquiry form.

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