Insolvency – what is it and how might it affect me?
In these uncertain times, it is possible that you will encounter insolvency in some form whether it is because your own business is struggling or because you are owed money from a business that has entered an insolvency process. A key question being asked across the board is: When The Worst Happens – what can be done with businesses that are forced down the route of insolvency? Meade King Associate and Insolvency Solicitor, Lisa Cooke, explains some of the of insolvency processes available together with how these might affect you.
Covid-19 Proposed protection for struggling companies
At the end of March 2020, the Government announced that it intended to temporarily suspend the rules on wrongful trading with retrospective effect from the 1st March 2020. This means that, during this period, directors will not risk personal liability for the debts and obligations which a company continues to incur at a time when the company was insolvent or at a time when the directors ought to have realised that the company would not be able to pay its creditors as they fall due.
The government has also announced that it intends to bring forward its plans to amend insolvency laws to give UK companies breathing space to enable them to keep trading while they explore options for rescue. These include:
• A moratorium for companies from creditor action while they seek a rescue or restructuring.
• Protection of supplies to enable companies to continue trading during the moratorium.
• A new restructuring plan that would bind all creditors.
However, none of the above changes have yet been legislated and the exact detail is still unknown, as is the timescale for when the legislation will be in place. In the meantime, directors should continue to consult with insolvency practitioners throughout their efforts to restructure or save their struggling businesses as, even if the promised changes are enacted, they will not give a director a free pass to act recklessly at the expense of the company’s creditors. Please see some further comments on this matter below.
Section 82 of the Coronavirus Act 2020 put in place protection to tenants from forfeiture between 26 March 2020 (being the date that the Coronavirus Act 2020 was passed) and 30 June 2020.
Whilst commercial landlords cannot seek to forfeit leases during the protected period, rent is still payable. Many landlords have been asked, or in some cases, have simply been notified by their tenants that the rent will not be paid. In many cases such a request is received sympathetically by landlords where it is clear that the tenant’s business has been severely impacted. More recently, the government has stepped in again to provide further protection to tenants. Commercial landlords are now (in most circumstances) banned from taking legal action (namely through the issuing a statutory demand/ winding up proceedings/ instructing bailiffs) to recover unpaid rent. This temporary prohibition will remain in place until 30 June 2020. Tenants are however encouraged to pay what rent they can during this period.
There are a number of Insolvency processes that apply in differing circumstances. Below is a closer look at some of the common insolvency processes that affect limited companies when they are no longer financially viable. The specific circumstances of each company’s financial position, together with a consideration of who is seeking to place the company into an insolvency process, will determine whether administration or liquidation is more appropriate. It should be noted that from the point of entering administration or liquidation, directors no longer have authority over the company, or control of its assets, unless express authority is given by the office holder in this regard.
Administration can expressly seek to rescue the business of the company as a going concern. As part of that process, Administration can provide breathing space from creditor actions as a result of the statutory moratorium that commences as soon as the administration process is instigated. The law and procedure relating to Administrations is predominantly set out at Schedule B1 of The Insolvency Act 1986.
There are two ways in which a company can enter administration; “out of court” or by way of an application to court for an Administration Order (the court route).
The “out of court” method is more commonly used as it tends to be quicker and cheaper. It is referred to as “out of court” because a judge is not required to review the application or make an order (as is the case with the court route). That being said, despite the slightly deceptive name, the requisite documents do still need to be completed and stamped by the court clerk, upon which, the administration appointment becomes effective.
For the period that a company is in administration, it is protected by a moratorium. The company can also gain the benefit of an interim moratorium which is effective from the filing of the initial documents at court (to commence the administration process) up until the appointment of an administrator, when the statutory moratorium comes into effect. The interim moratorium provides the same protections from enforcement (more detail below) so the company can arrange for the appointment of an administrator without creditor action occurring before that appointment can take effect. The interim moratorium is time limited to avoid an abuse of the process.
During the moratorium creditors are prevented from taking most enforcement action against the company including any action to distrain on or seize assets; forfeit a lease; issue a winding up petition; repossess good pursuant to a hire purchase agreement; enforce security; or pursue court judgments. This “breathing space” allows the company time to restructure, to enable it to continue to trade solvently when it emerges, or to determine that it cannot be rescued and thereafter enter into a company voluntary arrangement (CVA) or liquidation. It should be noted that creditors substantive rights are not ‘lost’ during the moratorium period, merely suspended.
If there is a danger that creditors are seeking to take enforcement action against a company, Administration can be a useful tool to freeze creditor action to allow the directors time to act in the best interests of the company and the creditors as a whole.
Creditors Voluntary Liquidation
A liquidator is appointed to have control over all company assets and affairs from the date of appointment. The liquidator’s role is not to try and rescue any part of the company but, as the name implies, liquidate it in it its entirety by extracting and realising any value for the benefit of creditors as a whole.
A Creditors’ Voluntary Liquidation (CVL) is a formal insolvency procedure which involves the directors of an insolvent company voluntarily choosing to bring their business to an end, and wind the company up. Although the process is entered into on a voluntary basis, it often follows the culmination of many months of financial distress when the possibility of a successful turnaround has been extinguished. Even though this is far from an ideal situation, for an insolvent company which has no viable future as a profitable entity going forwards, voluntary liquidation by way of a CVL may be the best solution for all concerned.
A CVL should not be confused with Members’ Voluntary Liquidation (MVL) which is a liquidation option for solvent companies whose directors may extract funds in a cost-effective manner before bringing the company to a close.
Compulsory liquidation or "winding up" is a court-based procedure under which the assets of a company are realised and distributed to the company's creditors. The procedure is started by the filing (or "presenting") of a petition at court. A judge then decides at a court hearing whether it is appropriate to make a winding-up order. The most common reason for a winding-up order is that the company is insolvent. At the end of the liquidation, the company is dissolved. The procedure is set out in the Insolvency Act 1986 (IA 1986) and the Insolvency (England and Wales) Rules 2016 (SI 2016/1024) (IR 2016).
Liquidation, whether compulsory or by CVL, will not remove the responsibility of guarantors for company’s debts that are secured by way of personal guarantee.
A note of caution to directors
If you are a director of a company that is experiencing financial difficulties, you need to make sure that you continue to comply with your director’s duties to avoid being potentially liable at a later stage.
The government has announced a suspension of the wrongful trading provisions whilst the current financial difficulties prevail (as noted above) but there is currently little detail about the exact nature of the suspension. In any event, whilst the wrongful trading provisions may be temporarily suspended, a director is still required to comply with their duties to the company, including their duty to act in the best interest of creditors if the company is insolvent, in accordance with section 172(3) Companies Act 2006.
What happens to me as a creditor if one of my debtors enters liquidation?
As an unsecured creditor of a company in liquidation, you should receive notification that a liquidator has been appointed and asked to submit a proof of debt setting out the extent of any monies due to you. Any repayment of your debt will be entirely dependent on the amount that the liquidator can realise from the sale of the company’s assets.
Secured creditors will be repaid directly from the sale of the requisite secured asset. After paying secured creditors, the residual monies will be used to pay the costs of the liquidation and the remainder will go into the “pot” for unsecured creditors. Preferential creditors will be paid from the “pot” first. This includes creditors such as employees of the company and, if current legislation currently moving through parliament is passed, HMRC in the near future. Only if there are monies available thereafter, will there be a distribution to unsecured creditors. If funds are insufficient to pay all creditors, the sum you receive will be a percentage based on the value of your debt compared to the overall body of unsecured creditors.
If you are an unsecured creditor of a company entering liquidation, the likelihood of receiving the entirety of your debt is slim. That being said, it is possible that you will receive a proportion on the debt. It is therefore always worth making sure that you complete your proof of debt, together with any evidence in support, and submit it to the liquidator in a timely manner to maximise your chances of a return. It is worth bearing in mind that some liquidations can be completed very quickly but others may take years to administer (for various reasons). It could therefore be some time before you receive any dividend but it may prove to be a welcome windfall if and when it does arrive.
If your debtor is a tenant, there are a number of additional considerations that you, as a landlord, should take into account and upon which you should immediately seek more specific advice to ensure that your position is protected.
For further help and advice from Lisa, please contact her today – she will be more than happy to help: firstname.lastname@example.org
Lisa is an Associate in the Insolvency team specialising in all aspects of personal and corporate insolvency. She has comprehensive experience of acting on behalf of both individuals and office holders in their capacity as liquidators and trustees in bankruptcy.
Lisa has experience advising in respect of a wide range of Insolvency Act 1986 and Companies Act 2006 claims including claims relating to void dispositions, transactions at an undervalue, preferences, fraudulent trading, wrongful trading, misfeasance, breach of duty and transactions defrauding creditors.