An introduction to the world of UK corporate insolvency

Nowadays our newspapers, televisions screens, Internet news channels, etc are filled with insolvency jargon, the latest on the doom and gloom of the recession and the latest company to be faced with administration. All rather depressing and particularly confusing when it comes to working out what is going on in the economy and how your business could be affected.

And on top of this, journalists are faced with a new world of problems which sees them mixing things up and using the incorrect terminology because they aren’t really clued up on the whole financial mess themselves and struggle to tell the whole picture themselves when they don’t even know the difference between a CVA or an IVA.

To give you a helping hand, here is a detailed account of insolvency jargon. Applicable to UK companies only, this guide will give you an overview about what it all means and what type of route you can take in order to undertake a business recovery scheme for your company.

Bankruptcy
Bankruptcy is only for people and not a company as a whole. When someone declares themselves as bankrupt, a trustee in bankruptcy is appointed to sell their assets and pay off their debts. In the UK a company cannot go ‘bankrupt’ however it is a commonly used word to best describe a business that has gone bust.

The rule on insolvencies does vary across different entities depending on whether they are individuals, companies, partnerships, limited partnerships, limited liability partnerships ect. So it is a good idea to check this out before hiring someone’s insolvency services.

Liquidation
Winding up = Liquidation.
In other words, the end of the road for a company. However, a company does not need to be insolvent to be wound up as it may have served its purpose and no longer needs to trade. With liquidation all a company’s assets are collected and sold, and its creditors paid. This may be in full or more commonly a percentage of what they were owed if the assets are not enough to cover all the company’s debts in full.
This process is done by an insolvency practitioner who is appointed to the task. They charge for their time and services by recovering expenses from the asset sale proceeds before the creditors are paid their shares.

Proof of debt is sent in to the insolvency practitioner by the creditors who will then decide whether or not to admit the claims as valid and eligible for a share.

Insolvency practitioners have to be fully licensed and need to take a set of exams, have suitable experience, no convictions or discreditable behaviour etc.

Most insolvency practitioners are accountants although there is a few that are originally trained as solicitors.

Administration

The administration procedure was introduced into the UK to try and promote a culture of rescuing companies to get them back on their feet, keeping jobs rather than closing and selling off companies and their assets at very low prices.

When a company falls into administrations it is almost as if they are gaining a bit of breathing space. It can keep on trading as normal however creditors are unable to take action against them e.g. a petition to wind up, repossession assets, sell mortgaged property, send in the bailiffs etc.

It is almost like a protection scheme from their creditors until they come up with a solution and sort something out.

An administrator is appointed to handle the process and try to achieve the best possible outcome for the business long term.

Company Voluntary Arrangements or CVAs

When a company enters into a CVA it is in agreement to an arrangement or compromise with its creditors. In other words it is where they will agree to receiving less than the full amount owed, with no further come back on to the company in the future.

The rule with a CVA is that if 75 per cent of eligible creditors vote in favour of the CVA then all the creditors are stuck with it and have to take less than what is owed to them.

An insolvency practitioner takes charge of a CVA and oversees the implementation.

Article Source: http://www.articledashboard.mk

Jake Lomax is the author of this article on Insolvency Practitioners. Find more information about Business Recovery here.

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