| Index »DEBT SOLUTIONS - OPTIONS AVAILABLE FOR BUSINESSES
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| DEBT SOLUTIONS - OPTIONS AVAILABLE FOR BUSINESSES
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| Company Voluntary Arrangement
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| A Company Voluntary Arrangement (CVA) is a procedure which enables the company to put a proposal to its creditors for a composition in satisfaction of its debts or a scheme of arrangement of its affairs. A composition is an agreement under which creditors agree to accept a certain sum of money in settlement of the debts due to them. The procedure is extremely flexible and the form which the voluntary arrangement takes will depend on the terms of the proposal agreed by the creditors. For instance, a CVA may involve delayed or reduced payments of debt, capital restructuring or an orderly disposal of assets, with the purpose of freeing up cash to enable some repayment of overdue debts to begin. This may require the disposal or redistribution of assets. A CVA may be used as a stand-alone procedure or as an exit route from an administration.
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| It may also be used where a company is in liquidation however this is extremely rare. The proposal will be made by the directors, the administrator or the liquidator, depending on the circumstances. The proposed arrangement requires the approval of at least 75% in value of the creditors, and once approved is legally binding on the company and all its creditors, whether or not they voted in favour of it. There is limited involvement by the court, and the scheme is under the control of an insolvency practitioner acting as a supervisor. Typically a CVA will last 2-4 years and includes an element of debt relief.
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| Administration
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| When a company is facing financial difficulties, it can be placed into Administration. Administration is a procedure which places a company under the control of an insolvency practitioner and the protection of the court with the following objective: rescuing the company as a going concern, or achieving a better result for the creditors as a whole than would be likely if the company were wound up without first being in administration, or, if the administrator thinks neither of these objectives is reasonably practicable realising property in order to make a distribution to secured or preferential creditors.
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| An administrator may be appointed by an order of the court, on application by the company, its directors, one or more creditors, or, if it is in liquidation, its liquidator. An administrator's powers are very broad. They include powers to carry on the company's business and realise its assets. The administrator displaces the company's board of directors from its management function and has the power to remove or appoint directors. The administrator must prepare proposals for approval by the creditors setting out how he intends to achieve the purpose of administration.
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| There is a one year time limit within which the administration must be concluded, but this period can be extended with the agreement of the creditors or the permission of the court if more time is needed to achieve the purpose of administration. The administration can be brought to an end if the administrator thinks the purpose of administration has been achieved or cannot be achieved. While a company is in administration creditors are prevented from taking any actions against it except with the permission of the court.
Reforms were introduced by the Enterprise Act 2002 to encourage the use of administration as the preferred vehicle for company and business rescue within formal insolvency.
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| What happens to the company on conclusion of an administration
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The company may be returned to the control of its directors and management. |
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The company may go into liquidation. |
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The company may be dissolved (if there are no funds for distribution to unsecured creditors). |
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If a voluntary arrangement has been agreed during the administration, the arrangement may continue according to its terms (it is possible for a voluntary arrangement to run paralally with an administration). |
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| Administrative Receivership (England And Wales)
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| Administrative receivers are normally appointed by a bank or other lender when a company breaches the terms of its borrowing from a creditor. This type of receivership is an enforcement remedy available to a creditor holding security which includes a floating charge over substantial assets of a company. An administrative receiver is appointed by the holder of the security but normally acts as agent of the company as he is appointed over the company's assets. The administrator is appointed by the creditor to whom the company owes money to recover the money owed to the creditor. It is common for an administrative receiver to continue to operate the business, whilst trying to sell it as a going concern. It will no longer be possible to appoint an administrative receiver under a security instrument created after 15 September 2003. This is part of the Government's drive to encourage the use of administrations in place of administrative receiverships.
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| Liquidations
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| Liquidation (or 'winding up') is the most common type of corporate insolvency procedure. Liquidation is the formal winding up of a company's affairs entailing the realisation of its assets and the distribution of the proceeds in a prescribed order of priority. With few exceptions, liquidation is the end of the road for a company and following liquidation it will be removed from the companies register. Liquidation may occur following a receivership or administration. Liquidation may be either compulsory, when it is instituted by order of the court, or voluntary, when it is instituted by resolution of the shareholders. Voluntary liquidation is the more common of the two. An insolvent voluntary liquidation is known as a 'creditors' voluntary liquidation' because its conduct is primarily under the control of the creditors. A solvent voluntary liquidation is known as a 'members' voluntary liquidation', because its conduct is primarily under the control of its members.
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| Compulsory Liquidation
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| Compulsory liquidation (or compulsory winding up) is instituted by an order made by the court, usually on the petition of a creditor, the company, or a shareholder. There are a number of possible reasons for making a winding-up order. The most common is because the company is insolvent. Insolvency is usually established by failure to comply with a statutory demand requiring payment within 21 days, or by execution against the company's goods being returned unsatisfied. A winding-up petition may also be presented by the Secretary or State for Trade and Industry on the grounds of public interest. In a compulsory liquidation the function of liquidator is in most cases initially performed by an official called the official receiver. The official receiver is an officer of the court and a member of The Insolvency Service, an executive agency within the Department of Trade and Industry. In most compulsory liquidations, the official receiver becomes liquidator immediately on the making of the winding-up order. Where there are significant assets an insolvency practitioner will usually be appointed to act as liquidator in place of the official receiver, either at a meeting of creditors convened for the purpose or directly by the Secretary of State for Trade and Industry.
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| Where an insolvency practitioner is not appointed the official receiver remains liquidator. Where a compulsory liquidation follows immediately on an administration the court may appoint the former administrator to act as liquidator. In such cases the official receiver does not become liquidator. An administrator may also subsequently act as liquidator in a creditors' voluntary liquidation.
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| Creditors' Voluntary Liquidation(Insolvent Voluntary Liquidation)
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| Creditors' voluntary liquidation (or CVL) occurs where the shareholders, usually at the directors' request, decide to put a company into liquidation because it is insolvent. A CVL is under the effective control of the creditors, who can appoint a liquidator of their choice. The CVL is the most common way for directors and shareholders to deal voluntarily with their company's insolvency.
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| Members' Voluntary Liquidation (Solvent Companies)
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| A solvent liquidation is known as a members' voluntary liquidation (or MVL), in which a liquidator is appointed by the shareholders and the company's assets are sufficient to settle all its debts with twelve months. MVLs may be used for purposes of reorganisation, or in the case of owner managed businesses to enable the shareholders to realise their interest in the company.
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| Tax Debt And Bankruptcy - An Overview
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| The approach of HM Revenue and Customs is the same across the UK, but the law on bankruptcy differs. The law in England and Wales changed significantly on 1 April 2004 when the Enterprise Act 2004 came into force. The information below is based on the position in England and Wales. The situation in Scotland and Northern Ireland is broadly similar, but for detailed information on procedures you should look at information from the appropriate insolvency service. If you owe HM Revenue and Customs more than £2,000 - and the local Recovery office has been unable to reach an agreement with you or to enforce payment - then your file may be passed to HM Revenue and Customs' Enforcement Office for consideration of bankruptcy proceedings. Commonly this will happen where you do not have enough assets for HM Revenue and Customs to recover the tax by distraint, and HM Revenue and Customs have obtained a County Court Judgement on which you have failed to make payments that are due. The Enforcement Office - which is based in Worthing, West Sussex - has sections in Edinburgh and Belfast. It will try to persuade you to pay the tax very quickly. If this fails, it will consider starting bankruptcy proceedings.
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| Bankruptcy does offer certain 'advantages. ie, once you are made bankrupt, you are no longer personally responsible for sorting out your debts. Your creditors must deal with your Trustee, which removes one enormous pressure of being in debt.
When you are discharged, most debts that you owed at the date of the bankruptcy which have not been settled by your Trustee are written off. So if you are hopelessly in debt and have no valuable assets to lose, bankruptcy may offer welcome relief from a desperate situation and the chance of a fresh start.
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| What Happens When Your Case Reaches The Enforcement Office?
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| When your file reaches the Enforcement Office, it will write to ask you to pay the full debt quickly (normally within 14 days) or to make a proposal for payment. It will sometimes accept an arrangement for the tax to be paid within a matter of months, but will not usually consider any offer that will take over a year to clear the debt. If you are not able to pay the tax or agree a payment arrangement, or if you fail to stick to a payment arrangement, the Enforcement Office will usually write to say that it is starting bankruptcy proceedings. It is important to understand that the Enforcement Office does not behave like most commercial creditors. In particular, it often petitions for bankruptcy even where it is clear that this will not benefit HM Revenue and Customs because the taxpayer has no assets. Indeed, sometimes the bankruptcy costs the government money, because the bankrupt loses their home and/or job and is forced to rely upon council housing and/or welfare benefits.
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| Very occasionally the Enforcement Office may decide not to take further action against a person who is unable to pay. This might apply where you have no assets and a low income, and your situation is unlikely to change in the future because you are older or suffering from long-term poor health. The debt is never written off completely, and bankruptcy action could be taken if your circumstances improved at a later date.
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| The Statutory Demand
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| The first stage in the legal process is the service of a statutory demand, which is a formal document stating the amount owed to HM Revenue and Customs. Normally this will be delivered to you by hand.By law you may apply to have a statutory demand from any creditor 'set aside', for example because the amount demanded is not due, but in tax cases such an application is unlikely to be successful. This is because section 70 of the Taxes Management Act 1970 says that the certificates that will be produced by HM Revenue and Customs, stating that tax has been charged and has not been paid, must be accepted by the court as sufficient evidence that the tax is due.
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| The Bankruptcy Petition
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| After three weeks have passed following the service of a Statutory Demand, HM Revenue and Customs may proceed to present a bankruptcy petition. The petition is filed at the High Court in London, and is then served on you personally. If you try to keep out of the way, so as to avoid receiving the petition, the court may order service in another way, for example by post or advertisement. The petition gives details of the tax due and tells you the date and time when the case will be heard at the Bankruptcy Court. This must be at least ten working days after the petition is served on you.
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| The Bankruptcy Hearing
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| HM Revenue and Customs petitions are heard in private before a Bankruptcy Registrar at the High Court in London. The procedure is not formal. You may represent yourself, or ask a lawyer, accountant, other adviser or even a friend or relative to present your case for you. There is a process for opposing a bankruptcy petition but, as with a statutory demand, there will not often be good grounds in a tax case. More often, you may want to ask the court for an adjournment, to allow time to raise the money, or reach a payment arrangement with HM Revenue and Customs, or Contest the amount demandd, or make a complaint if you believe that this might lead HM Revenue and Customs to withdraw its demand. The court may well be prepared to grant an adjournment for two months or so.
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| If during the period of the adjournment (or further adjournment(s) if granted) you are successful in raising the money necessary to clear the tax debt, or in reaching an agreement with HM Revenue and Customs or in getting the tax demand withdrawn, then HM Revenue and Customs will apply to have the petition dismissed, which is the end of the matter.
If you are not successful, HM Revenue and Customs will ask the court to make an order for your bankruptcy, to which the court is likely to agree.
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