There are about 1,600 licensed insolvency practitioners (IPs) in the UK; that doesn’t include the support staff in the background that assist the UK’s IP in providing comprehensive, professional and highly-experienced insolvency practitioner services for businesses across the country.
But IPs don’t just deal with liquidating companies; they are also business recovery professionals, i.e. helping to rescue businesses that are struggling with debt. Liquidation is not always the only option for an insolvent company. If an IP is called in early enough, it is possible to rescue the company from closing using other formal insolvency procedures – administration, receivership and company voluntary arrangements (CVAs).
What is an insolvency practitioner?
Firstly, let’s quickly explain what an insolvency practitioner is– an IP is a qualified, licensed and authorised practitioner that acts on behalf of an insolvent (or solvent in some cases) company in either liquidating the business, i.e. closing it down, or managing a business rescue process.
The ICAEW (Institute of Chartered Accountants in England and Wales) is the largest regulator of insolvency practitioners and business recovery professionals in the UK. A licensed IP is authorised to advise on and take on IP appointments in formal insolvency procedures, such as CVAs, company administrations and receiverships and liquidation processes.
What is business recovery and insolvency?
In many cases, IPs will act in an advisory role for companies who are struggling with debts and need independent, knowledgeable advice on how to resolve the situation, i.e. rescue the business.
Not all businesses and companies that are struggling with debt need to end up being liquidated. A key part of an IP’s role is to help ‘rescue’ a company. They may find themselves advising directors and developing business recovery plans that can help the company recover from their debt situation.
However, if it is not possible to rescue a company through an administration, receiverships or CVA procedure, liquidation is often the only choice left.
Often IPs will find themselves ‘caught in the middle’ in terms of competing interests. In most cases, an IP will have been working with a company to try and resolve the debt issue without ending up in a last resort situation. When this happens, they are working on behalf of the debtor. However, if it does go to the last resort, i.e. administration or liquidation, generally the same IP handles the process and thereby has to act in the best interests of the creditors.
What is company receivership?
Formally known as administrative receivership, it is a legal process whereby the holder of a ‘floating charge’ or they are a secured lender, i.e. a bank appoints a receiver to ‘receive’ the asset against which the funds were lent, and any other valuable assets, in order to pay back the debt. There are various reasons why a business recovery professional would recommend a company goes into receivership, such as the company has breached a lending agreement and needs to raise the funds to pay back the debt, but can do so by selling some of its assets.
A receiver is only entitled to sell assets to pay back their own debt, not that of other creditors. They have the power to:
- Ascertain the company’s asset value and decide how many they need to sell to pay back the debt
- They are entitled to remove directors and employees without impunity
- They decide how they will proceed and often don’t take advice from the directors
- They must pay any preferential debts, such as claims from employees for arrears of pay and holiday pay, before paying back their debt
- They must advertise the business and its assets for sale
- They must conform to rules and regulations that govern receivership and report to the DBEIS
- They must investigate the conduct of the directors of the company and file a report with the DBEIS.
What is company administration?
Company administration is a more favourable option to liquidation. An IP is appointed as the Administrator and they take control of the business’s operations, acting on behalf of the creditors. Their first job is to place a moratorium around the company in order to freeze any potential legal actions.
Because an Administrator can be appointed by the directors, the company itself or creditors, whereas with receivership, the directors don’t have any say in the matter, administration is often considered the better option for an insolvent company. In addition, this procedure is more likely to generate a better return for creditors through the sale of the company’s assets. It is also possible, if a buyer for the company is found, to save the jobs of the company’s employees.
An Administrator must ensure:
- They act on behalf of the creditors, not the debto
- Remain impartial at all times while they are in control of the company
- Act in good faith and adopt procedures with reasonable care and skill
- Take any reasonable action to achieve the best price for the company’s realised assets
- Ensure the process is carried out as quickly and efficiently as possible.
It is up to the Administrator to communicate with the creditors at every stage of the process including written notifications, statement of proposals outlining the company’s position and how it reached insolvency, arrange and host creditor meetings, present a summary of proposals, send progress reports every six months of the administration process and manage the entire process.
However, if the creditors are not satisfied with the Administrator appointed, they are entitled to form their own committee that represents their interests. The committee is usually made up of three to five creditors, usually those with the highest claim, and they must meet with the Administrator on a regular basis.
Company or individual insolvency is not something that anyone wants to deal with; however, the sooner a financial problem is recognised, the sooner it can be dealt with and the more potential the company has in recovering. If you are struggling with company debt and need advice on business recovery and insolvency or receivership, administration or CVAs, contact Simple Liquidation for assistance. For more information on how our professional insolvency practitioners may be able to help your business, contact us today.
