Business Law - Corporate Insolvency

The term insolvency is defined as the inability to pay off a debt. A company would be seen as being unable to pay off their debts if the company's creditors are able to prove to the court that the company is unable to pay their debts when they become due, this is known as cash flow insolvency. If for instance the company is unable to pay its debts and that the total value of the company including all of its assets are worth less than what they owe and will ever own in the future. This is known as balance sheet insolvency.

Owners of companies which becomes insolvent may be put into liquidation. The process of liquidation involves all the assets associated with the company being sold off to pay for all the outstanding debts. The liquidation process can be started by the company's directors or shareholders but the it will only be legally effective if all the creditors of the company agree and put in place a liquidator of their choice. This is known as creditor's voluntary liquidation.

Another option for the creditors is to apply to the courts for a winding up order which means that the company has to go into liquidation.

Creditors will be paid off in order of importance; this list usually goes as follows:

* To begin with the costs of the liquidation process should be paid off
* Next, preferential creditors will be paid off under applicable law
* Then it will be the claims of creditors with floating charges that will be paid
* If there is anything left after this, unsecured creditors will be paid according to a percentage of the amount of money that they are owed
* It is rare at this point for there to be any money left, but if there is, surplus assets will be distributed between member according to how much they are entitled to

There are two more options for companies that go into insolvency. These are administration and voluntary company arrangements.

The administration process involves the appointment of an administrator who will take over the company and attempt to pay off its outstanding debts. The main aim of administration is to help companies avoid going into liquidation although sometimes this will be unavoidable. There are several different types of administration and the administrator will decide what would be the best method for the company that they have been put in charge of.

A Company Voluntary Arrangement is a legal agreement between the business which is insolvent and their creditors. The agreement will set out the amounts of debt that the company will have to repay to its creditors. These amounts are usually less than the original amount of debt. Once an amount has been agreed, the company will make regular payments to their creditors. If the company fails to do this, then it will be put into liquidation. Creditors may prefer for a company to try a voluntary arrangement first as they will usually get more of their dept repaid than if the company was to go into liquidation.

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