Administration is a formal insolvency procedure that provides protection for a company experiencing financial difficulties from action being taken by one or more creditors. It provides the opportunity for the business to be sold in order to deal with its debts or to provide a “breathing space” to enable the company’s affairs to be restructured. Administration is a court procedure and when the formalities necessary to place the company into administration have been complied with, a moratorium is granted which places a freeze on any action by creditors.
An administration can also be used to provide protection from creditor action whilst proposals for a Company Voluntary Arrangement are put together. An administrator can continue to trade the business whilst the business and assets are marketed for sale. No action is able to be taken against the company whilst it is in administration.
Administration is particularly useful where there is a strong core-business but there are cashflow or other constraints which mean the company requires protection and/or restructuring.
You may be familiar with the terms “pre-pack” or “pre-packaged” administration. Details of this procedure are provided here “pre-packaged” administration.
In accordance with the provisions of The Insolvency Act 1986, in order for a company to be placed into administration, the administrator must be satisfied that one of the three statutory purposes of administration can be achieved. These three statutory purposes are as follows:
The company is normally placed into liquidation by filing forms with the court. This process is very quick an provides protection against legal action.
It should be noted, however, that this quick filing process is not available if a winding-up petition has been presented or a winding-up order has been made. If a winding up petition has commenced, a full court application and hearing will normally be necessary. It is important, therefore, in the event that a company which is experiencing creditor pressure which may lead to one or more creditors commencing winding-up proceedings, the directors take early advice so that the option of a quick appointment of administrators is still available.
A company can be placed into administration by:
Where the appointment is being made by the directors/shareholders and there is a qualifying floating charge over the company’s assets, 5 business days’ notice must be given to each qualifying floating charge holder of the intention to appoint an administrator. When the 5 business days has elapsed, the administration can be commenced.
Following their appointment, the administrator, as an officer of the Court, has very wide -ranging powers to deal with the company and its assets. The administrator has a duty to meet one of the purposes of administration set out in the Insolvency Act 1986.
The administrator will normally continue to trade the company while the options are fully assessed. Once the administrator has decided on the best course of action a proposal will be submitted to the creditors for approval.
Often the business will be marketed for sale while the business continues to trade. Whilst administration can give the opportunity for existing directors to purchase the business and assets, other parties, such as competitors and investors, will also be afforded the opportunity to make offers.
Advice should be taken at the earliest opportunity in order that the process can be managed in the best way for the benefit of all parties and stakeholders. a sale of the business through administration means the successor business is able to go forward without the debts associated with the previous company.
It is also feasible for the administrator to propose a company voluntary arrangement rather than selling the business.
Which ever alternative the administrator choses to put forward in the proposal to creditors, the overriding consideration will be the outcome for creditors.
A “pre-pack” administration is a procedure where the planning of the sale of the business and assets of a company is carried out prior to the appointment of the administrator. In a “pre-pack” administration, the sale of the business and assets is completed immediately following the appointment of the administrator.
In the right circumstances, a “pre-pack” administration can provide an effective means of dealing with the debts of an insolvent company. It is important that early advice is taken with regard to whether administration is appropriate for your company and Brailey Hicks can provide advice regarding the options available, contact us.
If your business is experiencing any form of financial difficulty, it is never to early or too late to take advice. The earlier that advice is taken will mean that more options are available, in most circumstances. It is always important for directors to take appropriate advice in order to protect their own position and also to ensure they are meeting their duties.
At Brailey Hicks, we acknowledge it is difficult and emotive to have to take advice regarding your company’s financial position. We have extensive experience of dealing with a wide-range of businesses and circumstances and we are always mindful that directors do not intend for their business to fail. In a lot of cases we have dealt with, it can be events beyond the control of the directors that lead to the financial difficulties, but whatever the circumstances, it is important to take professional advice.
There is a common misconception that, following insolvency advice, the business will be pushed into a formal insolvency procedure. Our experience is that an early meeting to discuss a business financial position will ensure more options are available and that time is available so they can be discussed and considered fully. Based on our extensive experience, the vast majority of businesses that we have advised do not enter a formal procedure.
There are no implications to a director in taking advice and it does not affect the company’s credit rating etc. However, directors should consider the implications of the company’s position deteriorating further after they have identified that it may be experiencing financial difficulties and may be in or approaching an insolvent position. Directors who allow a company’s position after identifying it is insolvent can become personally liable for the increase in the level of the company’s debts.
In the event that a company subsequently enters a formal insolvency procedure such as administration or creditors’ voluntary liquidation, the duly appointed insolvency practitioner(s) is required to submit a return to The Insolvency Service (“IS”) on the company’s affairs and the conduct of its director(s).
This is a statutory requirement and the report is used by IS to determine the fitness of the individuals to act as directors and may instigate disqualification proceedings where there is evidence of misconduct. Taking early advice from a qualified insolvency practitioner will therefore ensure that the director(s) is aware of the potential pitfalls and should ensure that any potential action against them is avoided.
Brailey Hicks will never charge for any initial advice meetings. Typically, initial meetings can last 1-2 hours, however, should there be circumstances where a longer meeting is required, no fees will be charged in this regard.
The Companies Act sets out the duties of a director of a limited company. If your company is insolvent or you have concerns that it may be experiencing financial difficulties which may lead to it becoming insolvent, you have a duty to the company’s creditors. You therefore need to establish very quickly if the company is insolvent. As directors you have a duty to take action so that the financial position does not deteriorate further. At this stage it is important that all creditors are treated equally and a director does not take action to prefer one or more creditors to others.
Taking professional advice as soon as possible is important both for the company and its directors.
You may have already injected funds into the company and may be considering putting in further sums to deal with the company’s financial position. Before putting in further personal monies or obtaining personal finance to inject into the company, advice should be taken. We have regularly met with directors who, without taking advice from their accountants or an insolvency practitioner, put further personal funds into their company, only to find that the effect was only to put off the inevitable failure of the company at which point they, in most cases, receive very little, if any, of the money back that they have put in.
It can be very emotive for directors, particularly those who have striven hard to make their business a success and often pride can lead to them not wanting to admit failure. Many businesses fail for a whole variety of reasons and at Brailey Hicks, our approach is not to “finger-point” or criticise a director in the event of a failure. We recognise that the vast majority of directors would rather do anything to avoid the failure of their company but there may be options which you have not yet considered, such as one of our restart options
In general, being a director of a limited company will mean that directors are not liable for its debts because the debts are due from the company. As directors, however, you may have provided personal guarantees to one or more creditor and it is important that you consider these in the event you are concerned about the viability of the company. Brailey Hicks can advise you in respect of personal guarantees as part of the process of advising you as directors of the company. In addition, if there is evidence of wrongful or fraudulent trading or other misfesance, directors can be held to be personally liable for the company’s debts (see below).
Insolvent trading is a term which is used regularly as a generic term and can refer to several different actions. So what should you be considering if you are trading and you also believe you may be insolvent?
The first thing to say is that you should definitely speak to a licensed insolvency practitioner as soon as possible. Early advice almost always means there are more alternatives available and if you are a director of a company and act without advice you could become personally liable for your actions.
If you are insolvent, you need to be careful to treat all your creditors equally and not to do any thing which might prejudice creditors if the business has to close. If you chose to pay one creditor ahead of others this could be a preference and if you decide to sell any assets for less than their market value this could be an undervalue transaction. Preferences and transactions at an undervalue are offences under the Insolvency Act and could lead to a personal liability for directors of an insolvent company.
You also need to be careful of incurring more debt with new or existing suppliers. This is a very difficult balancing act and it is important you document all decisions regarding continuing to trade because, if the business closes, you will be asked to confirm what your justification was. If you continue to trade after the point where there is no real prospect of avoiding liquidation, administration or bankruptcy and you make the position worse for creditors, you could be guilty of the offence of wrongful trading. If you are a director of a company, you may become liable for any detriment you have caused to creditors by carrying on trading. If you are a sole trader, you will already be liable for this debt but wrongful trading in a bankruptcy can lead to your bankruptcy restrictions being extended for several years.
For various reasons, cases of wrongful trading are rare and it is, therefore, of the utmost importance if you are accused of wrongful trading to take independent legal advice from a good insolvency solicitor.
This is only intended as a helping guide of some of the things to think about. Insolvency legislation is extremely complex and changes with new cases all the time. To ensure your specific circumstances are taken into account, the best advice is to speak to a licensed insolvency practitioner at Brailey Hicks.
Where directors have loan accounts due from them to the company and it is placed into an insolvency procedure, they will be required to repay the loan to the company. We have dealt with a significant number of companies where directors have had overdrawn loan account balances, which, whilst the company was solvent and trading did not cause any issues for them. Directors of companies placed into an insolvency procedure will be required to repay the balances. Brailey Hicks’ approach to dealing with the repayment of such balances is to deal with them by taking into account the personal circumstances of the directors and making arrangements accordingly.
A liquidator or administrator will review transactions between directors and a company as part of their statutory investigations. An overdrawn balance at the date of a liquidation will mean there is a debt due to the company which will require repayment like any other bona fide debts.
We have experience of companies where the advice from their accountants has historically been for shareholders to take dividends from the company as opposed to a salary as it is more tax efficient.
However, dividends can only be paid from distributable reserves and, where a company is placed into an insolvency, it is possible there were insufficient reserves for the dividends to be drawn. In this scenario the dividends can be deemed illegal and the directors can be required to repay them. It is, therefore, important to consider the company’s position at all times to ensure the risk of illegally paying dividends is avoided.
There are two tests for insolvency, the cashflow test and the balance sheet test.
The cashflow test means you are insolvent if you cannot pay your debts when they are due for payment. Examples which will mean you are cashflow insolvent include:
The balance sheet test means you are insolvent if your assets are less than your liabilities. i.e. you owe your creditors more than you own. When considering whether balance sheet insolvency applies you must also consider any contingent liabilities.
It is important to monitor the solvency of your business because if you continue to trade whilst insolvent there can be implications if the business subsequently ceases trading – see 'Should I be worried about insolvent trading?'
If one of your company’s creditors is owed money and has been unable to recover those moneys in line with the terms agreed, it can present a petition to the court for your company to be placed into liquidation and a date will be set for a court hearing to consider the petition. This is an extremely serious threat to your company and you should take advice from an insolvency practitioner as soon as possible. If you do nothing the company’s bank account is likely to be frozen and the court will most likely make an order at the hearing for your company to placed into compulsory liquidation.
As part of the process, the petition will be advertised and, at this point, bank accounts will be frozen which makes carrying on business almost impossible for most companies. There are still options and in some circumstances it is possible to unfreeze accounts but you need to act immediately.
Acting as quickly as possible and taking professional advice is extremely important if you have received a winding up petition in order to keep more options available. At Brailey Hicks our team of insolvency experts will discuss the alternatives calmly and professionally in plain English. Each time we advise in this type of scenario the solution is different because of the unique circumstances.
If you can’t afford to pay the debt immediately, Brailey Hicks can assist with several procedures which will help to avoid Compulsory Liquidation and the Official Receiver being appointed liquidator over your company. As part of your free consultation we will consider how the following procedures might fit with the specific circumstances:
If full or partial payment is possible but you need some time to pay, informal options or a CVA might be appropriate. In some circumstances, an administration can stop a winding up petition but this can be expensive because an application will need to be made to the court to explain why administration is more appropriate than a liquidation. If liquidation is the appropriate mechanism for your company, you can assume more control over the timing and outcome by instructing Brailey Hicks to assist you with placing your company into creditors’ voluntary liquidation as opposed to compulsory liquidation.
When a company enters liquidation or administration the insolvency practitioner has a duty to consider and investigate the conduct of the directors. These investigations have two primary purposes. The first purpose is to enable the insolvency practitioner to prepare a report to the Insolvency Service. The second purpose is to consider whether there are further actions which could recover funds for the benefit of creditors.
The insolvency practitioner will normally want to arrange collection of the company’s records at the beginning of the insolvency so that they can be reviewed. In addition, directors are issued with questionnaires which should be completed and returned promptly. If further explanations are required, it is normal for the insolvency practitioner to ask directors to elaborate on their answers in the questionnaire or explain anything unusual in the records.
Within three months the insolvency practitioner will submit an online report to the Insolvency Service. The Insolvency Service will consider the report and then request any further information they need from the insolvency practitioner. Based on this information the Insolvency Service will decide whether it should take any further action against the directors of the company for disqualification. If the Insolvency Service decides to prosecute directors for disqualification it will often approach the director to see if a voluntary disqualification can be agreed, in the first instance. This voluntary disqualification saves the Insolvency Service time and money and will often be less punitive than the disqualification order that will be sought if the case has to go to court.
Whilst the possibility of disqualification sounds very concerning, the levels of director disqualification are historically very low and the Insolvency Service’s approach is to only take action against directors who act deliberately against the interests of creditors and other stakeholders.
After the insolvency practitioner has completed the report to the Insolvency Service consideration will be given to whether further action is necessary in relation to any of the findings.
It is important to understand that each insolvency is unique and therefore employees are often treated differently. For example, in a company voluntary arrangement it is quite normal for employees to continue to be employed and paid with no need to make any claim.
When a company enters any form of insolvency employees can claim for amounts owing to them under their employment contracts from the Redundancy Payments Service (“RPS”), if necessary. Depending on the circumstances claims will often include the following:
Unpaid expenses cannot be claimed from the RPS. Any expenses owing to employees will be treated the same as any other creditor in the insolvency.
Brailey Hicks will inform the RPS of the insolvency and will be provided with a case reference. Then employees can complete their claims online. RPS aim to pay claims within 3 to 6 weeks of receiving the claim.
RPS does apply a weekly pay limit to the amount it will pay out. The limit is normally adjusted upward each year. Any amount which is due to an employee over the limit (the employee’s surplus claim) will not be paid by the RPS. This surplus claim can be claimed from the insolvency but there is no guarantee it will be paid, because this will depend on the specific circumstances of the insolvency.
A director can make a claim to the Redundancy Payments Service in the same way as any other employee. There are a few more forms to be completed and you will need to prove you were genuinely employed. Such proof of employment might include evidence you were included on the company’s PAYE scheme and a contract of employment.
TUPE Regulations (Transfer of Undertakings (Protection of Employment) Regulations 2006) is a piece of legislation designed to protect employee rights when a business is transferred or sold. It doesn’t matter if only part of the business is being sold TUPE is still likely to apply. Essentially, when a business is sold and TUPE Regulations apply, the employees will transfer to from the seller to the purchaser as if there was no change in their employment rights and entitlements whatsoever.
There are exceptions in some insolvency processes. Liquidation and bankruptcy are considered a terminal insolvency process and this means the the TUPE Regulations are relaxed by TUPE Regulations 8(7). Therefore, the rights and entitlements of employees do not transfer to the purchaser of assets and employees can claim from the Redundancy Payments Service.
Other insolvency procedures are considered to be non-terminal and therefore TUPE Regulations still apply to voluntary arrangements, administrations and administrative receiverships. In such circumstances where TUPE applies and employees are transferred, employees wont be able to claim from the RPO because their employment has not been affected.
TUPE Regulations is a complex subject and at Brailey Hicks we always advise anybody who is considering purchasing assets from an insolvent company to seek independent legal advice before proceeding.
A MVL is a liquidation process for dealing with a solvent company and is a tax efficient process for shareholders of a company to receive the cash and other assets that remain in a company after it has paid all its creditors in full. The liquidator in an MVL will make capital distributions to the shareholders rather than the shareholders receiving salary or dividends. The tax payable on capital distributions is, in most scenarios, much lower than if income tax was paid on the sums received.
An MVL is typically used where a particular company has reached the end of its life and/or the directors/shareholders are looking to retire.
It is worth bearing in mind that HMRC has brought in restrictions which prevent a shareholder who has received the benefit of a capital distribution from an MVL from operating or being involved with a company that carries out ‘similar’ activities within the next few years. Consideration to this position should be given prior to the commencement of an MVL in conjunction with Brailey Hicks and the company’s accountants.
A MVL has to be carried out by a licensed insolvency practitioner such as Brailey Hicks and further details can be found here.
The process of placing a company into a MVL is commenced by all or a majority of the company’s directors swearing a declaration of solvency which will have appended to it a statement of the company’s assets and liabilities. This is an important document and the directors will be swearing that they have made a full enquiry into the company’s affairs and that they are of the opinion that the company will be able to pay its debts in full, including interest if applicable, within a period of 12 months.
The board of directors will hold a meeting and propose resolutions to be put to a general meeting of the company’s shareholders. Depending on the circumstances the general meeting can normally be held on the same day as the director's board meeting which enables the liquidation process to be commenced very quickly and distributions to be made to shareholders in a very short timescale.
In all MVLs, Brailey Hicks (and other liquidators) will obtain an indemnity from the company’s shareholders to cover any proper claims that may be received that need to be settled by the company.
Distributions made in an MVL are treated as capital distributions rather than income which has the advantage for shareholders of reducing the associated tax payable by them personally. In many cases Entrepreneur’s Relief will be available (subject to satisfying several criteria) which reduces the tax liability further.
Distributions to shareholders can usually be made very quickly (often in a few days) after the liquidator’s appointment which benefits the shareholders as they can receive a significant amount their capital distribution very quickly.
Directors and shareholders should be aware that Brailey Hicks does not provide any taxation advice to either a company entering an MVL or to its shareholders personally. Any taxation advice would be provided by the company’s accountants. Ensuring the taxation advice is correct is a very important part of the MVL process and the existing accountants will have a thorough knowledge of the company’s affairs and may also act for the directors/shareholders personally.
When the company’s accountants recommend that an MVL is a suitable exit route for a company, the process can be commenced very quickly and will be planned in conjunction with the accountants so that distributions are made in the most tax efficient manner to benefit the shareholders.
MVL legislation provides for the payment of creditors in full plus statutory interest. The rate of statutory interest is currently 8% per annum and the sum payable on any company liability paid following the commencement of an MVL is at that rate for the number of days between the date of the liquidation and the date of payment. Where a liability is not particularly material, the amount of statutory interest will not be significant but where any liabilities are larger (for instance, a corporation tax liability) the interest can quickly become significant and there will be a corresponding reduces reduction to the amount distributed to the shareholders.
It is important therefore that all liabilities are identified prior to commencing a MVL and, where possible, settled prior to the liquidator’s appointment.
In short, yes. Non liquid assets, for example a property or book debts can be distributed to the shareholders in what is referred to as a ‘distribution in specie’. In simple terms this means the liquidator can distribute these assets by transferring the asset to the shareholder(s). For example:
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