UK Corporate Insolvency Guide: Complete Business Rescue Process
When a company faces financial difficulties, understanding UK corporate insolvency procedures can mean the difference between business rescue and total failure. This comprehensive guide explains what needs to be done and in what order, from understanding whether a formal insolvency procedure is an option for you, to how to file for one of the forms of insolvency and what happens after that.
Introduction to UK Corporate Insolvency
Corporate insolvency law provides structured pathways for companies unable to meet their financial obligations. Understanding these procedures is crucial for directors, creditors, and business advisors navigating financial distress.
Insolvency Legislation Framework
The law relating to UK corporate insolvency varies across jurisdictions:
- England and Wales: Primarily governed by the Insolvency Act 1986 and The Insolvency (England and Wales) Rules 2016
- Scotland: Incorporates elements of the Insolvency Act 1986, The Insolvency (Scotland) (Company Voluntary Arrangements and Administration) Rules 2018, and The Insolvency (Scotland) (Receivership and Winding up) Rules 2018
- Northern Ireland: The Insolvency (Northern Ireland) Order 1989 and The Insolvency (Northern Ireland) Rules 1991
When a Company is Considered Insolvent
Typically, when a company is ‘unable to pay its debts’, it is considered to be insolvent. The Insolvency Act 1986 describes two basic tests to help determine when a company is insolvent:
- Cash Flow Test: A company is insolvent if it currently, or will in the future, be unable to pay its debts when they fall due
- Balance Sheet Test: A company is unable to pay its debts if the value of the company’s assets is less than the amount of its liabilities, including contingent and prospective liabilities
If there is sufficient evidence that a company fails either test, it is deemed insolvent as it lacks adequate assets to cover debts or cannot pay debts on time.
UK Corporate Insolvency Procedures Overview
There are five main categories of UK corporate insolvency procedure. The first two concern companies that will not be resurrected and will ultimately be dissolved. The final three provide potential for company or business rescue:
Terminal Procedures
- Compulsory Liquidation (CWU)
- Creditors’ Voluntary Liquidation (CVL)
Rescue Procedures
- Administration (ADM)
- Administrative Receivership (ADR)
- Company Voluntary Arrangement (CVA)
Additionally, for solvent companies being wound up with capital returned to shareholders, legislation provides for Members’ Voluntary Liquidation (MVL).
Company Rescue vs Business Rescue
Understanding the distinction between rescuing the company entity and rescuing the business is crucial:
- Company Rescue: Usually achieved through a CVA, where the company entity itself survives
- Business Rescue: Typically accomplished through administration, where the business and assets are sold to another company
A CVA is often preceded by administration to provide moratorium protection while the company is being rescued. In CVAs, directors remain in management control, whereas in administration, the administrator replaces management as the company’s agent.
Liquidation Procedures
Liquidation is an insolvency process where an Official Receiver or insolvency practitioner (the liquidator) is appointed to realise all company assets and distribute them in statutory order to creditors.
Understanding the Liquidation Process
If a business is insolvent and cannot pay all debts, liquidation may be the only appropriate course of action. Liquidation is a terminal process that ultimately means the end of a company, although rare conversions to rescue procedures can occur when new information emerges.
The liquidator must be a licensed insolvency practitioner who becomes the company’s agent, charged with winding up the company and realising assets for creditors’ benefit.
Compulsory Liquidation
Compulsory liquidation occurs after a court makes a winding-up order. This happens when:
- A creditor petitions the insolvency court with an unpaid debt of £750 or more
- The company cannot pay debts or is balance sheet insolvent
- The court makes a winding-up order
Sometimes the Secretary of State may petition through the Official Receiver if it’s in the public interest (e.g., fraud vehicle). Directors may also petition for compulsory liquidation as it can be cheaper than creditors’ voluntary liquidation.
Voluntary Liquidation Types
Voluntary liquidation occurs when directors or shareholders agree the company should be wound up. It’s not necessary for the company to be insolvent before petitioning.
Members’ Voluntary Liquidation (MVL): Used when the company can pay debts within 12 months (solvent) and directors swear a statutory declaration of solvency.
Creditors’ Voluntary Liquidation (CVL): Used when directors don’t swear a statutory declaration of solvency. A creditors’ meeting is usually held on the same day as the shareholders’ meeting deciding to wind up.
Administration Process
Administration is a rescue-oriented UK corporate insolvency process where an ‘administrator’ attempts to keep the company operating or rescue value for creditors.
Administration Objectives
Administration can only be considered if it will achieve one of these sequential objectives:
- Promote the rescue of the company or suitable part (rare)
- Achieve better results for creditors than liquidation would provide
- Realise company property to enable distribution to preferential or secured creditors
Administration commonly lasts up to a year. If the company cannot resume trading, it will be dissolved if there’s no distribution for unsecured creditors, or liquidated to continue investigations and asset realisation.
Three Ways to Appoint an Administrator
An administrator must be a licensed insolvency practitioner and can be appointed:
- By court order: On application by the company, directors, creditors, or combination
- By floating charge holder: Filing notice at court
- By company or directors: Filing notice at court
Once appointed, the administrator takes over day-to-day management and must report to creditors within eight weeks, setting out progress and future plans.
Pre-Packaged Administration
Pre-packaged administration (‘pre-pack’) involves arranging the business sale prior to administration, which is then entered to effect the sale. This accelerated disposal process aims to:
- Preserve business value and ensure smooth transition
- Enhance realisations for creditors from sale proceeds
- Rescue jobs (though not a statutory administration aim)
- Minimise business disruption
The insolvency practitioner must test the market thoroughly and obtain the best deal for creditors, providing detailed justification through compulsory SIP16 reporting.
Administrative Receivership
When companies borrow money, lenders often require security over company assets, becoming secured creditors (fixed or floating charge holders). In administrative receivership, control transfers to an administrative receiver who sells assets to recover money owed to the appointing lender.
Key differences from administration:
- Initiated by secured creditors who’ve lost faith in the company
- Administrative receiver owes duty only to the appointing lender
- Virtually abolished by Enterprise Act 2002 for floating charges created after 15 September 2003
- Now the rarest insolvency route
Company Voluntary Arrangement (CVA)
A CVA allows companies to agree with creditors about debt management. It’s effectively a contract between the company and creditors, proposed by the company through:
- The administrator (if in administration)
- The liquidator (if being wound up)
- The directors
Creditors or shareholders cannot propose CVAs. The process involves:
- Insolvency practitioner (nominee) reports to court on whether creditor/shareholder meetings should occur
- Meetings decide whether to approve the CVA
- If approved, the nominee becomes supervisor
- Upon completion, company liability to creditors is cleared
Companies can continue trading during and after CVA completion, with directors maintaining managerial control throughout.
Choosing the Right UK Corporate Insolvency Procedure
Selecting the appropriate procedure depends on various factors:
- Company viability: Can the business be saved?
- Asset values: Are there sufficient assets for creditor returns?
- Stakeholder support: Will creditors support rescue attempts?
- Time constraints: How urgent is action required?
- Management capability: Can current management continue?
Professional advice from licensed insolvency practitioners is essential for navigating these complex decisions and ensuring compliance with statutory requirements.
Next Steps for Companies Facing Financial Difficulties
If your company is experiencing financial difficulties, early professional advice is crucial. Licensed insolvency practitioners can assess your situation and recommend the most appropriate UK corporate insolvency procedure to protect stakeholder interests and maximise asset recovery.
Understanding these procedures empowers directors to make informed decisions during financial distress, potentially saving businesses and protecting stakeholder value through appropriate rescue mechanisms.
