A company will be insolvent if it can't pay its debt when they are due, or if its liabilities are greater than the assets it holds. 'Insolvency' is also the term that describes the legal procedures that are used to help a company which has become insolvent.
Insolvency proceedings are formal steps that are taken to deal with company debts. Not all types of insolvency proceedings are the same. Different measures will be considered depending on the type of company and the kind of debts they have. Insolvency may be dealt with through:
Authorised insolvency practitioners oversee insolvency proceedings. They include:
A CVA is when a company makes a voluntary agreement with creditors to settle outstanding debts. The court must approve this arrangement. In many cases, a CVA will be proposed by directors of the company, but an administrator or liquidator can also do this. The hope is often that, by making voluntary arrangements, a company can avoid going into administration or liquidation. Meetings are held with creditors and members to get approval for the CVA. Creditors who are not happy with the proposed CVA then have 28 days to challenge it.
Administration is when someone is appointed to manage a company's affairs for the benefit of creditors. This person is called ‘the administrator'. The aim is to save the company and help creditors recover the money they are owed, which would be less likely if the company was wound up. An administrator is appointed by:
Within eight weeks, the administrator must make proposals about how the company can be turned around.
Receivership is overseen by ‘the receiver'. This person is appointed by the holder of a floating charge – someone who has made a particular type of loan to the company secured against its assets. The receiver has the power to sell the assets or to take other appropriate steps to repay the holder of the floating charge.
Liquidation is when a company is wound up. The person appointed to carry this out is ‘the liquidator'. There are two types of liquidation: voluntary liquidation and compulsory liquidation.
This can happen in two ways:
MVL happens when the directors have looked into the company's finances and declared that they believe it can pay off its debts in the next 12 months.
CVL happens when a company cannot pay its debts.
This is when a company is wound up by order of the court. This order can be made by the Court of Session or Sheriff Court. An order might be made after a creditor applies to the court because the company cannot pay its debts.