Insolvency Law

Going out of business

In the case that an employer does not have the funds to pay employees in full, a unique arrangement may be required; this is known as insolvency. In addition to the managing of employees' pay and immediate outgoings, insolvency also deals with debt handling and accounts.

There are variations of names illustrating alternative types of insolvency and their facilitators.

In the event that an employer is a limited liability partnership, company insolvency would mean one of the following:

  • liquidation
  • administration
  • receivership
  • voluntary arrangement with creditors

In the event that an employer is an individual, insolvency would mean bankruptcy (sequestration in Scotland) or a voluntary arrangement with creditors.

Cash flow insolvency

This is defined in two ways; known formally as cash flow insolvency and alternatively as business insolvency, in the instance where a debtor may be cash-flow insolvent, they will consequentially be unable to balance due payments.

Balance sheet insolvency

To be balance sheet insolvent is to have negative net assets, where payments due outweigh assets.

It is not uncommon for a company to be balance sheet solvent additionally to being cash flow insolvent in holding liquid assets, specifically within short term debts, facing the inability to realise if immediately required.

Equally, a company may display negative net assets on a balance sheet but can still be cash flow solvent in the event that ongoing revenue is forthcoming in meeting debt obligations. Frequently businesses function indefinitely in this position.

Procedures

The procedures for a limited liability partnership, or company insolvency are briefly detailed below:

Administration

Administration is an alternative process to liquidation, operating under insolvency laws in a number of common law regulations. Administration is offered as a final measure rescue device for companies under insolvency. The process ensures a business is able to continue operating whilst controlled by the Administrator (as interim Chief Executive), enabling the exploration of further financial resolution, including final measures such as dissolution.

Administration is a more commonly used measure of process throughout insolvency; the process offers both support and guidance throughout a temporary operations takeover to companies and organisations within reach of bankruptcy.

Laws regarding bankruptcy cover administration with regards to regulations and guidance including:

  • working alongside an interim chief executive to exploring resolutions
  • looking for administration takeover measures
  • relationship management with an interim chief executive

Receivership

Receivership is a common agreed condition for bank loans and overdrafts. Found under the term of a debenture, receivership acts as 'security' for the loan. Similar to clauses in most mortgages, debenture feeds power to the bank in the situation that the business or company are unable to repay finances or breaches lending terms.

Most banks cannot appoint a receiver due to new laws brought in on 13 September 2003. Any banks in agreement prior to this date however, will reserve the right.

Liquidation

Liquidation is often a result of bankruptcy. In the final stages of bankruptcy, after considering all available alternatives, the affected company would face liquidation. The ending of a company and division of assets due to acquired debts would be described as liquidation, frequently known as dissolution. Dissolution more specifically refers to the final stage of liquidation. Laws on bankruptcy investigate areas of:

  • the division of debts and assets
  • seeking liquidation
  • business start up after liquidation
  • the financial implications of liquidation

Company Voluntary Arrangement

A company voluntary arrangement, alternatively known as CVA, is a legal term used to describe a deal between a business and its creditors. This can include the negotiation of unsecured debts and assets, trade and tax. Initiating repayment plans from future profits, or through the sale of assets for immediate balance settlements.

A typical CVA agreement is based on preserving a business whilst protecting or instigating effective cash flow. Alternatively to administration, a company voluntary arrangement is facilitated through a profit making company requiring gradual service fee payments, promised through future profits over a period of time to be agreed.

In many cases the directors are able to remain in control of the company or business, with other negotiable factors depending on the CVA supplier and business circumstance, including the absence of guarantees and flexible costs.

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