Just as there are several different processes which can be taken when a company becomes insolvent (such as liquidation, administration, and company voluntary arrangements), there is also a variety of individuals or organisations can initiate insolvency proceedings concerning a company. The list of possible initiators under the Insolvency Act 1986 is broad and can include, for example, regulatory bodies such as the Financial Conduct Authority. In this note, three main actors involved in initiating insolvency proceedings and their role in doing so are explored.
Creditors
Perhaps one of the most obvious actors in initiating insolvency proceedings against a company is unpaid creditors of the company. However, perhaps less obviously, creditors can be involved in various processes related to the company's insolvency. Three such processes are detailed here.
Compulsory liquidation
A creditor (or creditors) who are owed at least £750 by the company in question can initiate what is known as compulsory liquidation to seek repayment of their debt from an insolvent company.
In order to do so, the creditor(s) must apply to the court via what is known as a ‘winding-up’ petition. If the court is convinced that the company should enter into liquidation based on one of the grounds found in the Insolvency Act 1986, it will grant the petition, and the winding-up process can begin. The most common ground that will be used is that the company is unable to pay its debts.
After this, a liquidator will be appointed to take control of the company. Eventually, the creditor(s) will receive any money they are entitled to if there is enough left once it is their turn to be paid under the ranking rules.
Creditors’ voluntary liquidation
Another way a creditor could be involved in insolvency proceedings is through what is known as Creditors’ voluntary liquidation (CVL). Despite the name, CVL is not actually initiated by the creditors but rather the shareholders of the company (more on which below). Although not directly involved in initiating the proceeding, if a company enters into CVL then the creditors have a large amount of involvement in the process, including in choosing the liquidator and receiving reports on the progress of the liquidation.
Company voluntary arrangement
Finally, the creditors are also involved in what are known as company voluntary arrangements (CVAs). During times of financial hardship, a company can agree with (the majority of) its creditors to enter into a CVA which will allow the company a defined period of time to pay their debts.
As you can see, there is a wide array of ways in which creditors can be heavily involved in insolvency proceedings - both contentious and uncontentious.
Directors
Directors can also be involved in initiating and setting up schemes to deal with the insolvency of companies which they are directors of. Two key processes which directors are involved will briefly be addressed here.
Company voluntary arrangement
Directors may propose to the shareholders and creditors of the company that they enter into a CVA. Ultimately, the choice will be made by the creditors and shareholders themselves, but the director(s) can play an important part in getting the ball rolling here, especially if they sense that more serious action may be looming if they do not address a company’s looming debts with haste.
Administration
Directors also can place a company they are a director of into administration. They would likely do this to protect the company from looming creditor attacks and try to rescue the company. There are some conditions which apply before an administrator can act for the company and try to help it become solvent again (such as the company actually being insolvent and proving that administration is likely to achieve a better result for the company’s creditors than liquidation) - but provided these are met then this is a viable option open to directors during times of insolvency.
It is also true that directors can apply for a winding-up petition from the court just as creditors can, but this is far less common.
Members/Shareholders
Finally, the shareholders of a company can have great involvement in initiating and being involved in insolvency proceedings. Three of the main ways will briefly be addressed here.
Voluntary liquidation
Shareholders are the main initiators of a company entering into voluntary liquidation. CVL has already been discussed above for when a company is facing times of financial difficulty, but there is a second type of voluntary liquidation which can be initiated by the shareholders of a company - namely ‘members’ voluntary liquidation’ (MVL). MVL is distinct from CVL because a company must be solvent to enter it. This means that it must have the ability to pay its debts. Once MVL has been initiated, it will (like all other forms of liquidation) lead to the company dissolving and reaching the end of its life. The shareholders will be required to pass a special resolution in order to enter into CVL or MVL.
Although at first sight it may seem odd that the shareholders of a solvent company would want to bring the company to an end, there are various reasons why this might occur. This can include personal reasons such as the shareholders wanting to retire or no longer be involved in the industry the company operates in.
Company voluntary arrangement
As mentioned above, the shareholders can also enter into a CVA to give the company time to pay its creditors when it is facing financial difficulties.
Administration
Finally, it is worth mentioning that the shareholders can appoint an administrator much like directors can.
Overall, shareholders can be involved in many of the insolvency proceedings in which their company is involved.
Contact our Insolvency Solicitors in Central London today
Whether you are a director, shareholder, or creditor considering initiating or have found yourself involved in corporate insolvency proceedings, our insolvency solicitors at Lewis Nedas Law are able to guide you through this process.
Contact us on 020 7387 2032 or fill in our online enquiry form to get help from our team.
