Insolvency Law - An Overview

Insolvency law covers companies that have run out of money to pay their creditors and employees. If an individual was in the same position as this, it would be known as bankruptcy. There are two different ways that a company can be classed as insolvent; these are cash flow insolvency and balance sheet insolvency. Balance sheet insolvency means that what is needed to pay out exceeds its realisable assets. Cash flow insolvency means that the company cannot pay its debts that are due straight away and will be unlikely to be able to pay its debts anytime time in the future. In the UK there are four different ways that a company can go insolvent, these are; administration, receivership, liquidation or winding up and a company voluntary arrangement.

Administration is the process in which an administrator tries to rescue a limited company. If a company chooses to go into administration, its assets will be protected. A company will have to apply for administration directly from the court. An administrator will put a plan in place to try and recover the debts owed by the company. During the administration period the administrator will run the company as opposed to the directors.

The second process of insolvency is receivership. In the UK this is known as administrative receivership and involves elements of administration. In the process of administrative receivership, a creditor can apply for security on a company's assets to ensure that their debt is repaid. This method is mostly used by secured creditors.

Another process in insolvency law is liquidation or winding up. In this process, a liquidator is put in charge of collecting all the assets from the company and selling them off in order to pay the company's creditors. A company may be forced into liquidation if they are unable to pay off a debt which is over £750 after they have been issued with a statutory demand that needs to be repaid within 21 days.

The last option in insolvency law is to make a company voluntary arrangement. This is an agreement made between a limited company and its creditors to pay of their outstanding debts within a designated time period of usually around 1-5 years. In company voluntary arrangements, the company's creditors will usually accept a lower repayment for the debts that they are owed. A proposal for an agreement has to be made by the company in debt, not by the creditors. A company voluntary arrangement is a good option for companies which have just started out and need time to build up a good level of trade. A company voluntary agreement also means that a company does not need to have the stigma that is associated with going into liquidation which can be advantageous for companies who wish to change their unsuccessful business plan. A company voluntary arrangement in most successful when the company applying for it is upfront and honest about their income and outgoings.

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