Sometimes a company gets into a serious financial trouble. It is the responsibility of the director to spot this problem and try to resolve it. If a company is in financial problems it has several options how to sort this out. A company should start one of its insolvency procedures. A company can therefore agree either formally or informally with its creditors on the extension in funding on some terms, it can put itself in administration, call in a receiver or put itself into liquidation. There are various collective and enforcement insolvency procedures which help resolve the matters. The difference between the two procedures is that enforcement procedure enables the creditor to enforce its rights against the company as opposed to collective procedure. Primary aim of collective procedure is to help the company survive.
Administration is one of the insolvency procedures whereby its aim is to rescue the company. Creditors will be unable to enforce their rights against the company without the court consent. An administrator must be appointed. The administrator will then manage the company with a view to succeed and rescue it. The appointment will put a stop on all creditors’ actions without court consent, such a stop is called moratorium. E.g. no order to wind up a company can be made, no administrative receiver can be appointed, and the landlord will not be able to forfeit the property.
There can be a few different types of receivers. The appointment of an administrative receiver represents a type of an enforcement procedure whereby the creditor will want to get paid by realising the assets over which he holds the security. Administrative receiver will take possession of the assets, sell the assets of a company and repay the debenture holder. There is a significant disadvantage in calling in an administrative receiver. There is no moratorium while there is administrative receivership. This effectively means that creditors may still apply for winding up order.
Liquidation or winding up
Liquidation is a procedure whereby the company’s assets are realised and divided between all of its creditors. Liquidation can be voluntary or compulsory. Following the liquidation the company will cease to exist. There must be sufficient grounds for the company to be wound up. The most common grounds can be for instance: if the company is unable to pay its debts and if the court thinks that it will be just and equitable to wind up that company. The order of priority is set out in the Insolvency Act 1986. The liquidator will divide the proceeds of the sale of assets between creditors.
For more information on:
- The Order of Priority on winding up of a company
- Why is there a need for such an order?
- Liquidator’s costs
- Preferential creditors
- What is ring fenced fund?