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Corporate Rescue: Appointment of an Insolvency Practitioner

Info: 5017 words (20 pages) Law Essay
Published: 6th Aug 2019

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Jurisdiction(s): UK Law


“The law governing the insolvency of individuals has its roots in the earliest days of the common law, when there was no collective Procedure for the administration of an insolvent’s estate and a disappointed creditor could seize the effects of his debtor and, at a later date, his person also [1] .”

Insolvency law of the United Kingdom deals with the insolvency of individuals and the insolvency of the firms. The important statutes of the insolvency act 1986 were further amended by the insolvency Act 2000, companies Act 2006 and Enterprise Act 2002. New provisions on voluntary arrangements and moratoria amended the provisions of the company director disqualification act 1986 (CDDA) [2] .


Insolvency is a financial state of obligation where a company can no longer pay its bills on time. In simpler terms it refers to the inability of a company to pay off its bills. Companies which cannot successfully pull themselves out of insolvency often face bankruptcy proceedings, receivership, or liquidation of all assets.

Insolvency is defined in the insolvency Act 1986 under section 123, which is of 2 types:

1. Cash flow insolvency; and

2. Balance sheet insolvency.


1. “A company is deemed unable to pay its debts-

(a) If a creditor (by assignment or otherwise) to whom the company is indebted in a sum exceeding £750 then due has served on the company, by leaving it at the company’s registered office, a written demand (in the prescribed form) requiring the company to pay the sum so due and the company has for 3 weeks thereafter neglected to pay the sum r to rescue or compound for it to the reasonable satisfaction of the creditor, or

(b) If, in England and Wales, execution or other process issued on a judgement, decree or order of any court in favour of a creditor of a company is returned unsatisfied in whole or in part, or

(c) If, in Scotland, the induciae of a charge of a payment on an extract decree, or an extract registered bond, or an extract registered protest, have expired without payment being made, or

(d) If, in Northern island, a certificate of unenforceability has been granted in respect of a judgement against the company, or

(e) If it is proved to the satisfaction of the court that the company is unable to pay its debts as they fall due.

2. A company is also deemed unable to pay its debts if it is proved to the satisfaction of the court that the value of the company’s assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities.

3. The money sum for the time being specified in subsection (1)(a) is subject to increase or reduction by order under section 416 part XV”.


The Credit Crunch and Insolvency: A lay person’s view

“Ever wondered what caused the credit crunch? An over simplified answer is perhaps the inability of some to pay what is due as per the definition of insolvency as stated under the Insolvency legislative regime.

In practical terms is that if Albert owes Bob a minimum of £750.00, Bob could (at least in theory), make a statutory demand that Albert pays up.

The very sending of a statutory demand sets off a chain reaction. If then, Albert fails to deal appropriately with the said demand and procrastination kicks in, then Bob could as a creditor, present a bankruptcy petition against Albert to the court. The court will subject to various basic requirements make an Order adjudging Albert bankrupt.

It is then for Albert to undergo a damage limitation exercise. The long and windy road of limiting the damage and reversing this.

With the right advice, the right steps, at the right time, the tables though, can be turned”.

3 September 2010


When a company faces financial difficulties and when the business stops trading the basic choice is to either employ a liquidator or arrange for rescue procedures. Apart from these two the third alternative option which is used in rare cases may be appointment of an administrative receiver.


When trading of a company stops and becomes insolvent liquidation helps in winding up the company by allowing the company to sell all the remaining assets. Through Liquidation company comes to an end but the business may survive. There are 3 types of liquidations.

A. Creditors voluntary liquidation: (picture/flow chart).

CVL is the most common and highly used form of liquidation in England and Wales. When the company runs into liquidation and when the directors think that there is a need to rescue the company they call for a meeting and say to the shareholders that the company is no longer viable and became insolvent so they must stop trading. Then within 14 days of that meeting the share holders must ask a licensed insolvency practitioner to call a creditors meeting and allow the directors to present ‘statement of affairs’ which consists of the companies liabilities and assets. The creditors in this meeting can question the directors preceding liquidation. Later in the meeting the creditors appoint a liquidator by voting individually. This type of liquidation mainly arises because of the pressures of the outside creditors. After the liquidator is appointed the company ceases trading and the company’s employees are dismissed.


Once the liquidator is appointed by the creditors and members of the company the liquidator has the following important powers and duties:

Before the liquidation the liquidator fills out the forms and conducts the necessary meetings.

He should investigate the conduct of the director’s.

The liquidator must gather and distribute the assets of the company in accordance with the statutory order.

The liquidator in addition to the power of selling the company’s assets he has a right to appoint agents, check the bank accounts and carry on the company’s business which helps in winding up of the company.


B. Compulsory liquidation/ compulsory winding up:-

A company when unable to pay its debts and finds no other means to repay back the amount, on the application of a petition by an appropriate person the court gives a winding-up order and is put into compulsory liquidation. The winding-up petition is usually presented to the court by the creditor/s. even if the company runs into voluntary liquidation or administration also a winding up petition can be presented to the court.

A companies winding up order [6] is made if:

The company has decided that it should be wound up by the court;

Registered as a public limited company more than a year previously but has not yet been issued with a trading certificate; is an ‘old’ public company;

Has not begun trading within a year of its incorporation or has suspended its trading for a whole year;

Has less than two shareholders, unless it is a private company limited by shares or guarantee; cannot pay its debts;

Has reached the end of a moratorium without approval of a voluntary arrangement; or

Should be wound up because the court forms the opinion that this would be just and equitable.

The petition can be presented at the high court in the area where the company is registered.


A solicitor is generally instructed to deal with the winding up petition. Statements of truth must be produced before the hearing of the petition to the court and those statements must be verified. The petition must be served for hearing at least five working days before. It must be served at the registrar office of the company. The petition must be advertised in the London Gazette at least 7 business days after the petition is served on the company and at least 7 business days before the hearing. When filing the petition the required deposit of 1000 pounds and a court fee of 190 pounds must be paid and should produce all the necessary sufficient copies which can be served on the parties whom so ever concerned and on the company. A petitioner must fill a form 4.2 (insolvency rules 1986) for filing a petition for winding-up of a company and disclose that all the statements mentioned in the petition are true. The court then if satisfied gives a date and place where the petition will be heard. A copy of the petition (sealed by the court) must be served on the company at its registered office, or if this is not possible, at the company’s last main place of business, or on a company director or company secretary. A copy of the petition (sealed by the court) must be sent to any voluntary liquidator, administrative receiver, administrator, supervisor of a voluntary arrangement or Member State liquidator appointed to the company. Service of the petition must be proved by a certificate of service. You must file it in court not less than 5 business days before the hearing of the petition. The notice of petition must be advertised in the London gazette by the petitioner so, that if anybody is interested or has any objections may express them by attending the hearing. If the company is not satisfied with the facts mentioned in the petition, it may oppose the petition by filing its statement of opposition to the court at least before 5 days of the hearing. The amount of one thousand pounds must be deposited towards the cost of administration of the liquidation of the company. The petitioner on the day of hearing must prepare and submit a list of people appearing at the hearing by filling the form 4.10 (insolvency rules 1986) At the hearing, the petitioner, creditors, the company and its shareholders all have the right to be heard and the court may also choose to hear anyone with an interest in the company’s property. The court can then:

Dismiss the petition;

Adjourn the hearing;

Make a winding-up order;

Make an interim order; or

Make any other order it thinks fit.

There are 3 ways of stopping up a winding up procedure:

By the court or by any person on behalf of the company or the company itself can apply for rescind if they think that all facts are not produced or some of the produced facts are not correct at the time of passing of winding up order.

The company if not satisfied by the order it can appeal against the winding-up order to the court. The court if satisfied by the appeal may rescind the order or may change or alter the order accordingly in or against the favor of the company.

The proceedings of the case in the court can be stopped by the liquidator or by a creditor or by a shareholder temporarily or permanently. If the liquidation proceedings are stopped permanently the directors of the company can continue in their same old posts and regain the controlling power on the company.

Compulsory liquidation is the last option for winding up of the company which must be usually avoided. When the company gets into compulsory liquidation an official receiver is appointed for winding up the company according to the orders issued by the court. The official receiver has several duties like,

He has to make a report about the conduct of the company’s directors under the Company Directors Disqualification act 1986 to the secretary of the state.

He may appoint an insolvency practitioner as a liquidator by conducting a meeting with the creditors.

He has to make sure that the companies winding up is published/advertised in the gazette or can advertise the winding up order in any other way if required.

He has the right to obtain the information from the company’s directors and investigate/look into the reasons or causes for the failureness of the company. While collecting the information the directors has to cooperate with the liquidator by handing over all the assets, records, books, statements etc., of the company to him and provide all the required information clearly and addend the meeting/interview when ever require

C. Members voluntary liquidation:-

A members voluntary liquidation is a procedure followed for the companies which are solvent i.e., the company is not insolvent. For this type of liquidation the directors must make a formal announcement/declaration of the solvent company at least five weeks before passing the resolution of the voluntary winding up of the company. When the directors declare that the company is being solvent without proper reason it can be charged with a criminal offence.

The members of the company when winding up the company voluntarily, has to file at the company’s house. When the companies operations are ceased and there is a disagreement between the shareholders about managing the company in future the members of the company will opt for the voluntary winding up of the company. Although the company may incur losses it is still considered as a solvent company. It is important that 75% of the members must agree to the voluntary winding up of the company in the meeting generally held and a liquidator is appointed who will distribute all the assets accordingly among the members of the company.


There are three alternatives to liquidation when a company runs into insolvency:


Company voluntary arrangement (CVA).

Administrative receivership.


The most chosen alternative to liquidation is CVA. It is also known as individual voluntary arrangement. This type of alternative can be suggested by the liquidator or director of the company. When a company runs into insolvency i.e., financial troubles in spite of liquidating the company they can go for one of the alternatives i.e., company voluntary arrangement which helps in making an agreement with the creditors for payment of all or part of the debt within the given period of time. A creditor or shareholder cannot apply for Company Voluntary Arrangement and a creditor can be prevented

From action being taken against the company or the property of the company for up to 28 days by making a moratorium application to the court.

On CVA being proposed the nominee of the company reports to the court whether the creditors and share holders should hold a meeting to consider the proposal where the approval of CVA is decided. To finalize the proposal 75% of creditors should agree to the terms and conditions of the agreement and those who get the notice are entitled to vote and such creditors should be bound to the terms of arrangement. The nominee will be the supervisor of CVA when the creditors and share holders agree on or approve of the CVA in the meeting. On carrying out the CVA the creditors are cleared of the company’s liability. A company can carry on trading both during and after CVA. CVA can be set up by the company during administration or liquidation or at any other time.


Stigma of liquidation can be avoided by a Business through CVA.

A new business plan can be put in place for a company.

Time management for a successful and profitable future of the company can be achieved.

The appropriate business model can be determined and the trading difficulties that have been experienced during start up can be overcomed.

Pressure from creditors can be minimised for businesses that are profitable in the short term.

Restructuring of a business can be done.

Companies that plan to wind up can choose CVA as an alternative to ease out the process.


Directors of a company usually propose for a CVA unless an administration order is issued or a liquidator is appointed in which case the concerned person may seek for the agreement. A nominee drafts a proposal with the assistance of the directors who is a licensed insolvency practitioner for company voluntary arrangement (CVA). Once these proposals are drafted, they would be sent to the stakeholders. These stakeholders are given a notice of 14 days and are provided with the details of the CVA creditors meeting. The stakeholders are as follows:

a) The Court,

b) The company Creditors,

c) The company shareholders.


Administration is the other alternative to liquidation apart from the company voluntary arrangement and administrative receivership. An administrator is appointed by the court who is a licensed insolvency practitioner. His main aim is to save/rescue the company as a growing concern or at least save a part of the business of the company from the creditors. The administrator must serve the purpose for which he is being appointed he must act in the interest of the creditors. Under this alternative the creditors or the directors have an opportunity to apply/request the court to put the company into administration. This procedure is set out in schedule B1 and schedule 1 of insolvency act 1986 which is later amended by the “enterprise act 2002″. When the company runs into administration the company is usually runned by the administrator on behalf of the creditors but not by the directors.

The administrator is an agent of the company and has power to take any decision for the benefit of the company and is not liable for the contacts made in this process. Apart from the court the administrator can be appointed by the floating charge holder or the directors of the company. This administration process can last for a year or may further with the consent of the creditors be able to get extended. When administration is chosen as an alternative to liquidation its main objectives must be to rescue the company to the maximum extent possible; must continue to do trading before selling of the company and must distribute the selled off assets and money to the creditors accordingly.



The administration order helps the limited companies by protecting them from the creditors and court. The administrator who is a licensed insolvency practitioner is required to carry on the administration order appointed by the court.


The company when enters into administration, immediately its assets are selled by the administrator, this process is known as pre-pack administration. When selling the assets sometimes the management or the previous managers may purchase the company’s assets from the administrator.

The pre-pack administration has its own advantage when compared to other forms of administration i.e., when the company’s previous directors or the managers of the company purchase the assets of the company the good will of the company is preserved and the employees also get the their preserving job in the new company.

A recent example [10] of a pre-pack is the sale of the assets of Cobra Beer to Coors immediately after Cobra Beer entered administration. This allowed the brand to continue, save jobs but also leave suppliers out of pocket by an estimated £75 million.


The administrative receiver is appointed generally by the court or by the charge holder to control the assets of the company fully or partly. The receiver is an individual who has no right/authority to deal with the unsecured creditors claims. The chapters 69 and 56, paragraphs 56.93 to 56.114 explain about the procedure of an appointment of a receiver and his powers and duties.

Definition of administrative receivers [11] [section 29(2)]:

An administrative receiver is –

a receiver or manager of the whole (or substantially the whole) of a company’s property appointed by or on behalf of the holders of any debentures of the company secured by a charge which, as created, was a floating charge, or by such a charge and one or more other securities, or,

a person who would be such a receiver or manager but for the appointment of some other person as the receiver of part of the company’s property.

The receivers actions gets ceased when the security is realised or repaid and when the company house gets notification about this.


A company when becomes insolvent and is thinking for wind up the company an insolvency practitioner who is licensed or authorised is appointed according to the insolvency procedures laid down in the insolvency act 1986. The insolvency practitioners may be either lawyers or individuals with accounting background. An insolvency practitioner can only act legally in accordance to individuals and company [12] as

a nominee in a voluntary arrangement

a trustee in bankruptcy

under the arrangement or deed acts as a trustee

a trustee under the trust deed

a liquidator


trustee of partnership

administrative receiver


The secretary of state (SOS) has the responsibility for policy of insolvency for regulatory reform, business, trade and enterprise under the recognized provisions of insolvency act 1986. This act recognizes certain members called professional bodies to authorize the purpose of an IP. Apart from this the secretary of state authorizes few insolvency practitioners directly. The members appointed by the RPBs (which are independent bodies) as insolvency practitioners are regulated by the insolvency services. For getting qualified as an insolvency practitioner one of the main essential requirement is that joint insolvency examination must be passed by the individual. The insolvency practitioners must have a ‘bond’, which is a form of an insurance recognized by the law which is legal, so that when the insolvency practitioner acts fraudulently or shows partiality or dishonest a claim can be made on him. The insolvency practitioners are monitored regularly by their concerned authorized bodies. They (insolvency practitioners) must abide to the statements of insolvency practice, should take professional education and should act in accordance with the professional and ethical code.


The licensed insolvency practitioner under the UK law if unless the office is hold by an official receiver he must deal with the following insolvency procedures which are formal:









An individual or an organization when unable to pay its debts to the creditors it is generally considered as the inability of the individual. This inability to pay its debts is legally known as bankruptcy. The creditors when wants to regain a part/portion of the amount or property owned by them but given to the business they may file a petition against the debtor/business which is known as bankruptcy petition. In most of the cases the bankruptcy is suggested by the debtor, which is also known as “voluntary bankruptcy”.

A bankruptcy in United Kingdom relates only with the individuals and partnership but not to the companies or different procedures like liquidation and administration.


The following are the alternatives which a company can choose in spite of going for bankruptcy:

Debt Relief Orders

family arrangement

Administration orders

Individual voluntary arrangements


A fee of £150 is to be paid to the court. The court if thinks deem and fit may sometimes depending on the circumstances, income and situation waives the court fee.

A deposit of 450 pounds must be paid in all the cases to manage the cost of bankruptcy.

In the country court for swearing on the statements of affair no fee is charged, but a solicitor or the high court charges a fee of 12 pounds.


Liquidation is also known as winding-up or dissolution of the firm. Through liquidation the assets of the company are redistributed and the company is brought to an end completely or partly. There are two types of liquidation i.e., a) compulsory liquidation and b) voluntary liquidation. The company may choose any of the above mentioned liquidations for winding up the company.


A liquidator is appointed under section 91 of part IV (winding up of companies registered under the companies Acts) and chapter II (members voluntary winding up) of insolvency act 1986.

The appointment of the liquidator is decided in the general meeting of the company in the members’ voluntary winding up. Once it is decided, the liquidator is appointed for redistributing the assets of the company for the purpose of its winding up.

Once the liquidator is appointed the director no longer has the controlling powers over the company unless given by the liquidator.


Deed of arrangement is a very less often procedure used. This type of procedure is helpful to the company when there are only few creditors. The creditor’s threat for applying a petition for bankruptcy is reduced after the enforcement of the insolvency act 1986 as the deed of arrangement is not included in the bankruptcy. Compared to individual voluntary arrangements the deed of agreement is cheaper as it simply requires the creditors acceptance in number and value approval. For this process neither court fee nor a nominee is required and it is not necessary to send a report to the court, but the protection or safety level is less in deed of arrangement than individual voluntary arrangements.

Deed of arrangement is useful to the individuals, traders or partners of a company who have few creditors with financial problems/difficulty.


The drafting of the deeds of arrangement of the debtor’s offer to the creditor is very easy and simple. For the arrangement of the deed, the majority of creditors should approve it which is a simple procedure when compared to individual voluntary arrangements. The creditors who accepted/approved the arrangement are bound by its terms. For registering a deed a judicial fee of £1.50, a fee of £1.10 is to be paid towards debtor’s affidavit and a fee of £1.10 is to be paid for execution affidavit to the registrar.

The insolvency practitioners apart from the above mentioned insolvency procedures also deals with the trust deeds only in Scotland as the law varies there. They also deals with the creditors directly for the people who are facing serious money problems under individual voluntary arrangements and stop them (creditors) from financial uncertainty. Their main aim is to avoid bankruptcy.

The insolvency practitioner can do the wind up the company when appointed by the court. Generally in such cases the insolvency practitioner is referred as ‘official receivers’, who will be dealing with your company.

An insolvency practitioner is appointed when the official receiver gets to know that the amount which is recovered is to be more than expected. When a company runs into liquidation in spite of the insolvency practitioner a liquidator is appointed though the company is still solvent. In the creditors voluntary liquidation the appointment of insolvency practitioner is made by the creditors where as in all the other cases the insolvency practitioner is appointed by court or by the official receiver.


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