FAQs on commercial insolvency

What is insolvency?

Commercial insolvency in England and Wales means that a company is unable to meet its debt repayments, often due to cash flow problems. Additionally, a company can be legally insolvent if the total value of its assets is less than the amount of its liabilities. Generally, it is illegal for a business to continue trading if it is legally insolvent.

What is an administrator?

An administration order can be made, out of court, by either the directors or shareholders of the company or by the company bank (if the bank holds a qualifying floating charge). Alternatively, an administration order can be made in court, generally by the company’s creditors. In either case, an administrator is appointed to deal with the company’s financial affairs from the time the order is made. This offers protection to a company against having to pay all of its creditors immediately, while a financial solution is sought.

What is a CVA?

A Company Voluntary Agreement (CVA) is a legal procedure that allows by which an insolvent company reaches an agreement with its creditors to repay all or part of its debts at an arranged amount over an agreed period. The company’s directors, administrator, or an appointed liquidator can apply for a CVA, which could also involve a planned disposal of company assets to allow the repayment of debts. While bound by the terms of a CVA, creditors cannot pursue legal action against the insolvent company.

Who can order the winding-up of a company?

Any creditor who is owed over £750 can apply to the court for a winding-up order, which, if granted, will force a company into compulsory liquidation. The creditor will ask a solicitor to make a petition to the high court, which will grant a hearing date. Once the petition has been issued, a company will have fewer options to avoid liquidation. A company in this position will benefit from seeking advice from a specialist commercial insolvency solicitor.

What is the hierarchy in which creditors will be paid?

Commercial insolvency may end with the assets of a company being collected and distributed to creditors. In that case, there is a hierarchy in which creditors will be paid: firstly, the administrators; secondly, the creditors, thirdly, the employees (redundancy pay and wages); and fourthly, any other party owed money, including customers.

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