Understanding Types of Corporate Insolvency Procedures
Corporate insolvency occurs when a company is unable to pay its debts as they come due or when its liabilities exceed its assets. Depending on the financial situation and objectives, there are several types of insolvency procedures that a company may enter into. Here’s a brief overview of the most common ones:
Liquidation
Liquidation, or winding-up, is a formal process where a company’s assets are sold off to pay creditors, and the company ceases operations. There are two types:
- Voluntary Liquidation: Initiated by the company’s shareholders when the business is no longer viable.
- Compulsory Liquidation: Forced by the court, usually after a creditor files a petition for unpaid debts.
Administration
Administration is designed to rescue a company or achieve a better return for creditors than liquidation. An appointed administrator takes control, aiming to reorganize or sell the business as a going concern. This provides the company with a temporary reprieve from creditor actions, allowing time for restructuring.
Receivership
Receivership involves the appointment of a receiver, usually by a secured creditor (e.g., a bank), to seize and sell specific assets as repayment. The receiver works for the secured creditor’s interests, often without regard for other creditors.
Company Voluntary Arrangement (CVA)
A CVA allows a company to reach an agreement with its creditors to pay a portion of its debts over time, while continuing to operate. The company avoids liquidation, but must have its repayment plan approved by 75% of creditors by value.
Pre-pack Administration
In a pre-pack administration, the company’s assets are sold before it formally enters administration. This is often done to speed up the process, protect jobs, and maximize the value of the business, although it is sometimes criticized for lacking transparency, especially when assets are sold to connected parties.
Insolvency Practitioners – Keywood Group
Each procedure has its pros and cons, and the right choice depends on the company’s financial state, the level of creditor support, and the likelihood of rescuing the business. Seeking professional advice early can often lead to a more favorable outcome.
Keywood Group is a firm of Licensed Insolvency Practitioners with offices based in Birmingham and London. Please get in touch for a free consultation by calling us today on 0121 201 0399 or 0208 912 0399
