Insolvency options
Facing financial difficulties can cause a great deal of stress as well as taking its toll on health your personal and business relationships.
There are several options available, but it is important to tackle the problem as early as possible.
Here we outline the options available and their implications for both personal and corporate insolvency.
Personal Insolvency
This is a formal legal process by which individuals can deal with debts which they are unable to pay. The bankruptcy process ensures that the assets of the individual are divided amongst those to whom money is owed (creditors). It is a way to make a fresh start, free from the onerous debts, but the process does influence your credit rating for six years after the Order is made.
It is possible to declare yourself bankrupt, but creditors can also apply to make an individual who owes them money bankrupt too. Once declared bankrupt the Official Receiver (or an Insolvency Practitioner) is appointed to take control of the individual’s assets and they are referred to as the ‘trustee in bankruptcy’. It is a legal requirement to co-operate with them in the orderly disposal of your assets.
All assets are essentially transferred to the trustee, but you will be allowed to keep items which are necessary for work along with everyday household items such as furniture and clothing. The effect of bankruptcy freezes your bank accounts. It is possible to open a new account after the date of the bankruptcy, but you must tell the bank or building society that you are bankrupt. If you own your home this can be sold to pay your creditors although there are protections if you have a partner or children living with you. You can arrange to negotiate with the trustee in bankruptcy to purchase your share of the interest from the bankruptcy.
A trustee can also sell your motor vehicle but can ‘exempt’ this if deemed necessary for work or family circumstances. There is normally an average value attributed to the vehicle which you can retain. It is in the region of £200 to £3000 in value subject to your personal circumstances.
If you are self-employed your business will be closed with any business assets being claimed by the trustee. You can commence trading again but there are several strict requirements which you will need to follow. The trustee will realise your assets for the benefit of your creditors but, if you can afford it, the trustee may require you to make payments towards your debts from your income for up to three years. This will be dependent upon the amount of surplus income you have after all your monthly necessary expenses have been taken into consideration. There is a process for establishing an appropriate level of contribution based on your income and expenditure.
Your discharge from bankruptcy usually occurs after 12 months but can be extended if you do not co-operate with the Official Receiver /your trustee. There are other options which you can consider BUT you MUST obtain professional advice as soon as possible.
Other options include an Individual Voluntary Arrangement (IVA). This is an agreement with all your creditors to contribute a certain number of monthly payments for the equitable distribution to your creditors over a period, normally five years. An Insolvency Practitioner will need to be consulted who initially acts as your Nominee and then once your proposal is ratified by 75% of the requisite majority of creditors voting then the IP becomes your Supervisor. His or her job is to monitor the monies being contributed into the arrangement and ensure that you adhere to all the terms and conditions of the IVA.
An IVA can be set up so that it settles all or part of your debts which can include regular payments or lump sum contributions. This is a formal agreement administered by an insolvency practitioner which can be quite onerous but essentially prevents creditors from taking action against you and avoids bankruptcy. However, failure to comply with the terms of the arrangement can ultimately still result in bankruptcy.
You can enter into a debt management plan (DMP) which is similar to an IVA but it is NOT a formal process. A debt management company which will collect contributions from you and distribute them between your creditors. This type of arrangement is only available for unsecured borrowings.
A DMP is available where debts are less than £20,000, where you have negligible spare income or assets which can be realised. This route has similar restrictions to bankruptcy.
Corporate Insolvency
A company is deemed to be insolvent when it is unable to pay its debts as they fall due or has liabilities which exceed its assets.
There are a few legal procedures for dealing with a company’s insolvency but the main avenue for this is to liquidate the company. Creditors can take action to recover the amounts owed to them through the courts which can result in an application to wind up the company if those debts remain unpaid.
The directors of the company can also apply to wind up the company themselves. If a company is to be wound up, or liquidated, it will cease trading and ultimately be struck off from the Companies House register and will cease to exist. An insolvency practitioner is appointed to act as the liquidator which involves realising the company’s assets, settling any outstanding legal matters, before distributing any available funds to the creditors.
The director’s responsibilities if the liquidator is appointed by a Court to wind up the company is to cooperate with the Official Receiver /liquidator in providing him/ her with any such information and documentation to assist with maximising the assets realisations for the benefit of the creditors. The case is dealt with by the Official Receiver if there are limited assets available for creditors. Where there are more substantial assets to deal with then an external IP is appointed to deal with this.
The liquidator has the responsibility of investigating why the company became insolvent and will ask you to provide the company’s records and other information about the circumstances which led to the company being liquidated. You will be released from your obligations as a director on the appointment of the liquidator but have an ongoing legal obligation to co-operate with the liquidator.
After the insolvent liquidation, you will be able to act as a director of another company unless specifically prohibited from doing so. The liquidator will consider whether the insolvency resulted from the conduct by the directors which is deemed to be unfit and contributed to the failure of the business. If that is the case a disqualification order can be sought which prevents you from acting as a director of a company from 2 to up to 15 years in the most serious cases.
You can also be held personally liable for the company’s debts. There are provisions in UK insolvency legislation for ‘wrongful trading’ which means that you could potentially be personally liable for some of the company’s debts. This occurs if you allowed the company to continue trading past the point at which it was apparent that an insolvent liquidation could not be avoided and took no action to minimise the losses faced by creditors.
Other options include Company Voluntary Arrangement (CVA) A binding agreement supervised by an insolvency practitioner which provides for the payment of all, or part of the company’s debts over a period of time. This requires the agreement of at least 75% of the creditors. It does, however, mean that the company is able to continue trading during the CVA and afterwards but a failure to comply with the terms of the arrangement can ultimately result in the company being liquidated.
The other option is, Administration. This process essentially passes control of the company to an insolvency practitioner, the Administrator, which has the effect of preventing the creditors from taking legal action to recover their debts. The Administrator’s role is to identify potential courses of action to make the company profitable again or to realise more funds than simply liquidating the company. It may be possible to sell the business as a going concern for example.
Whether you are facing bankruptcy on a personal level or in respect of a company in which you are a director it is vital that professional advice is obtained at the earliest opportunity so we can advise you of the options available. Please contact us for more information.
Next Steps
If you want to find out anything further about this topic then please feel free to call on 0330 236 9930, 0330 236 9938 or 07961 116321. All conversations will be in strict confidence. You can also email vee@navigatebr.com
This article is for information and interest only. It is not a substitute for full professional advice, which will take in to account the specific and individual circumstances. Navigate Business Recovery Limited cannot accept any responsibility for any loss arising as a result of any person or organisation acting or refraining from acting on any information.
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