The insolvency practitioner's role in corporate insolvency
With few exceptions the Insolvency Practitioner's (IP) duty in insolvency appointments is to maximise the realisation of assets and when appropriate to pay a dividend to the creditors from surplus funds in the order of priority as laid down in law.
There are several types of insolvency procedures in both personal and corporate cases, with different legislative requirements. In many insolvency processes the IP is entitled to trade a business, sometimes requiring specific court sanction to do so. In liquidations however the liquidator can only trade on if by doing so he can achieve a better realisation for the creditors.
Insolvency practitioners are required to submit reports on directors to the authorities. Errant directors may be prosecuted or disqualified from acting as directors.
The legislation, regulations and Statement of Insolvency Practice (SIP) 9 lay down the rules with which IPs must comply when seeking remuneration for their services. There are minor differences in legislation and practice but in essence all IPs must be able to provide documentation in support of their claims for remuneration, whether the claims are submitted for approval to the creditors or to the courts. The law provides for the IP advising creditors of the fee that has been fixed and it provides creditors with an appeal process.
A brief overview of the different types of corporate insolvency processes follows.
Where a company is insolvent, or is likely to become so, it can be placed into Administration. The company is then under the control of an insolvency practitioner who acts as agent of the company. Reforms in the Enterprise Act 2002 encourage the use of this procedure as the preferred option for business rescue in formal insolvency. The objectives of placing a company into administration are:
- To rescue the company as a going concern
- To achieve a better result for the creditors as a whole than would be likely if the company were liquidated
- or, if the administrator thinks that neither of the above objectives is reasonably practicable, the objective is to realise property in order to make a distribution to secured and preferential creditors
The administrator prepares proposals setting out how he intends to achieve the purposes of administration. The proposals are submitted to the creditors for approval. The proposals can be amended with the approval of creditors. The company enjoys the protection of the court as creditors are prevented from taking any actions against it during administration except with the permission of the court.
An administrator's powers are very broad and he can remove and appoint directors. The company remains in administration for a year but this period can be extended with the permission of the court if more time is needed to achieve the purpose of administration.
The administration may be brought to an end if the administrator considers that the purpose of administration has been achieved, or cannot be achieved. Depending on the outcome of the administration the company may enter the insolvency process of Company Voluntary Arrangement (CVA), go into liquidation, or be returned to the directors.
Company voluntary arrangement
This is a flexible procedure which allows the company to offer its creditors a composition in satisfaction of its debts, or a scheme of arrangement of its debts. In essence the company puts proposals to its creditors and provided 75% in value of its creditors approve the proposals they become binding on all the creditors. There are no restrictions to what can be proposed.
An IP will be appointed as supervisor to administer the proposals and to reach agreement with creditors. The IP will make distributions as agreed in the proposals. There is minimal involvement of the court. This procedure is widely used in England & Wales and is becoming more common in Scotland.Once the proposals have been completed the company is able to move on.
Receivership and administrative receivership
An organisation (usually a bank) that holds a floating charge over a company can appoint a receiver. During a receivership the receiver is in charge of the company and makes all the decisions and acts as agent for the company.
The receiver's main responsibility is to the floating charge holder and then to the preferential creditors; he has no responsibility for dealing with the debts of unsecured creditors. If the debt due to the floating charge holder is settled in full the business may be handed back to the company. This will sometimes involve finding a new source of funding.
If the business is not viable the receiver will normally seek the appointment of a liquidator to deal with the interests of the remaining creditors.
In England & Wales a receiver may be appointed under the Law of Property Act 1925 (LPA). The appointment is effected to deal with a specific asset which is the subject of a fixed charge.
Once the asset has been realised and the funds remitted to the holder of the fixed charge, the LPA receiver demits office.
LPA is not applicable in Scotland.
Creditors’ voluntary liquidation
A company is placed into a creditors' voluntary liquidation (CVL) usually on a decision being taken by the directors that the company is insolvent and requires to stop trading. The directors will consult an insolvency practitioner, or a lawyer, for assistance in handling the necessary procedures and in convening a meeting of creditors to approve the appointment of a liquidator.
The company may nominate a liquidator but it is the creditors who choose and appoint the liquidator. The liquidator is required to provide periodic reports to creditors. Creditors are able to exercise a measure of control over the liquidation process.
Court liquidation/compulsory liquidation
This type of liquidation is very prevalent in Scotland, much more so than in England & Wales.
A creditor, the directors, or shareholders of a company may petition the court for the appointment of a liquidator. The Secretary of State may also petition in the public interest.
The most common reason for a petition is that the company is insolvent and unable to pay its debts but there are other reasons why appointment may be sought. In some instances a provisional liquidator may be appointed, his duty is to preserve the assets and trading of the business until such time as a liquidator is appointed. A liquidator may be appointed to a company which has been through an administration process which has not achieved its purposes.
In Scotland the court will appoint an interim liquidator who has the task of convening a meeting of creditors to appoint a liquidator (the interim liquidator does not automatically become the liquidator). The appointment at the creditors' meeting is dependent on the value of claims lodged at the meeting and the way those creditors vote.
The provisional liquidator, and the liquidator once appointed, are officers of the court and responsible to it.
Members’ voluntary liquidation
A members' voluntary liquidation (MVL) is a procedure for closing a solvent company and returning value to the shareholders. The process is for cases in which all debts can be settled within a 12 month period of the company going into liquidation.
The shareholders appoint the liquidator, they approve his fees and he is answerable to them.
MVLs are often used for the purposes of reorganisation.
Where it becomes clear that the debts cannot be paid in full the liquidator is required to take steps to put the company into insolvent liquidation.