Help! I think my company is insolvent, what may happen next?

Insolvency can be a challenging and stressful situation for any company (and its directors). However, taking prompt action and understanding your options can help protect your business, creditors, stakeholders and risks of a personal claim. Whether your goal is to restructure, rescue, or wind down the company, each insolvency process has unique advantages and challenges.

It’s important to remember that as a director, your legal duties shift when a company is on the brink of insolvency to prioritising the interests of creditors. Seeking professional advice from an experienced solicitor or insolvency practitioner early on can help you navigate the process, minimise risks, and make informed decisions to achieve the best possible outcome.

In her latest blog, litigator Helen Rainford will be explaining the following procedures, the advantages and disadvantages and what this may mean for your company. Click the titles below to find out more.

If your company is insolvent, it may enter into one of the following insolvency procedures:

1. Administration
2. Creditors Voluntary Agreement (CVA)
3. Scheme of Arrangement
4. Liquidation

Administration

How does a company enter into administration? 

There are two ways a company may enter administration: 

1. A court order. An application is made by either the company itself, a creditor of the company, the company directors, a liquidator, a supervisor of a Creditors Voluntary Agreement (CVA) 
2. Filing a notice of appointment and supporting documents at court. This can be done by the company itself, the directors or another party such as a lender which has a floating charge.  

What are the advantages of the administration process? 

1. Protection against legal action. The company will be protected from the actions of the creditors, such as a winding up petition. The protection begins from before the administration starts and lasts until an application to the court is made. 
2. Time. The administration will automatically end after one year unless it is extended by the courts or the creditors.  
3. Qualified professional. An Administrator is a qualified professional and will have the experience to turn around the company where possible. They may be able to advise on how to restructure the business which may result in the company coming out of the administration in a better financial position. 
4. Possibility of resuming trade after the administration ends. Should the administrators be able to rescue the company, it may continue to trade after the administration ends and control of the company will pass back to the directors.  
5. Best deal for the creditors will be achieved. The main objective of the Administrator is to recover the debts due to the creditors and so it should result in a better financial return for the creditors. 
6. Other options.  Administration can be used as an initial step before other measures are taken, such as a CVA.  

What are the disadvantages of the administration process? 

1. Costs. The process can be costly, and the fees of the Administrator will be borne by the company. 
2. Time. Whilst the administration period usually ends after one year, an application can be made for the time to be extended. 
3. Control. Whilst the company is in administration, the powers of the directors are curtailed, and they will not be able to exercise any control of the company without the written consent of the administrator. It is only if the company ceases to be in administration that the directors will regain their control. 
4. Director investigations. The administrator is tasked with identifying any misconduct or wrongdoing which may have contributed to the company’s insolvency. The administrator will therefore investigate the conduct and financial affairs of the company and the conduct of the directors within the last three years before administration and will report the findings to the UK Secretary of State. Should the practitioner find evidence of wrongdoing, the director(s) may face a fine, disqualification, criminal prosecution or even be held liable for the debts of the company. 
5. Personal guarantees. If a director provided any personal guarantees, once the company is e, enters administration he creditor(s) may call upon those and the director may be held liable to the extent of the guarantees for those debts.  
6. Brand reputation. Any administration will be published in the London Gazette and dependent upon the company, may feature in the mainstream media. Such publicity may negatively impact the ability of the company to continue to trade and operate.  

Creditors Voluntary Agreement 

What is a CVA? 

A CVA is an agreement between the company and its unsecured creditors to settle outstanding debts, typically over the period of three to five years. A CVA is a compromise between the parties; it is likely that the payment to the unsecured creditor will only be a portion of the outstanding debts. Payment will be made in order of priority (i.e. preferential creditors first, such as HMRC) and once the distributions are made, a certificate of completion is issued.  

 The company cannot enter into a CVA unless it is insolvent or is about to become insolvent. 

 An Insolvency Practitioner (IP) is required to provide a statement that the agreement is considered feasible and fair. The company must therefore be able to demonstrate that there is a feasible future for the company and provide the cash flow projections to demonstrate this. Should they make such a statement, the IP will then supervise the CVA. 

How does a company enter into a CVA? 

A CVA is typically proposed by the directors of the company (although it can be proposed by an administrator or liquidator) and will be voted on by the unsecured creditors. In order for the CVA to pass, the vote requires at least 75% of the creditors to vote in favour. Once the creditors approve the proposed CVA, it will come into force (unless another time scale is otherwise agreed).  

The CVA will bind all unsecured creditors who are entitled to vote, regardless of whether they voted in favour or not. It also binds unknown creditors and even those entitled to vote but who did not receive notice of the proposal.  

What are the advantages of a CVA? 

1. Protection against legal action by the creditors. Once a CVA is agreed, the creditors of the company are prohibited from taking any steps which are not in accordance with the terms of the CVA. 
2. Control. The directors of the company retain control of the company and its assets during the process. The company can continue to trade. It may also provide the company with an opportunity to restructure and/or re-evaluate the business.  
3. Informality. Compared to other options, the process for a CVA is somewhat informal and the involvement of the court is minimal, unless there is a challenge to the CVA brought by the creditor. 
4. Flexibility. It is possible to provide that the terms of the agreement could be flexible dependent upon the needs of the company and its creditors. 
5. Costs. A CVA is typically less costly to the company than other insolvency procedures, such as an administration.  
6. Brand reputation. A notice of a CVA will not be published in the London Gazette or with other media and so it is more discrete and therefore less likely to damage the reputation of the company. However, it is recorded at Companies House and any suppliers and creditors of the company should be informed of the CVA. 
7. Investigations. The IP will not investigate the conduct of the directors however they will need to be provided with cash flow forecasts.  
8. HMRC. If HMRC is one of the creditors, subject to certain conditions, they are likely to vote in favour of the arrangement.  
9. Consolidation of debts. All debt repayments will be consolidated into one monthly payment over an agreed time period. 

What are the disadvantages of a CVA? 

1. Protection against legal action. There is no automatic moratorium granted on the agreement of the CVA to prevent other actions of creditors, which are not catered for in the provisions of the terms of the CVA. However, one can agree for a specified period of time within the agreement. Further, should the terms of the CVA be breached in any way, the creditors are entitled to take legal action against the company. 
2. Order to revoke the CVA. If a creditor feels they either were unfairly prejudiced by the CVA or there was a material irregularity in the conduct of the procedure, they are entitled to apply to the court for an order to revoke the CVA. A challenge must be made within 28 days of the vote.  
3. Debts after the voting. Any debts which are incurred after the creditors vote on the CVA are not included within the agreement and so may continue to increase.  
4. Secured creditor. A CVA does not affect the rights of a secured creditor who is entitled to enforce such security regardless of the CVA. 
5. Credit rating. The CVA may affect the credit rating of the company. 
6. Landlords. Unlike HMRC, landlords are typically less likely to vote in favour of a CVA. 

Schemes of Arrangement 

What is a Scheme of Arrangement? 

A Scheme of Arrangement is a court-approved process under part 26 of the Companies Act 2006. Using a Scheme of Arrangement an agreement between the company and its creditor(s) or a class of creditors can be reached to repay the outstanding debts. Using the scheme, a company may also use this to restructure, merge or demerge the company. 

Unlike a CVA, it can bind secured creditors if approved by the required majority and sanctioned by the court. 

How does a company enter into a Scheme of Arrangement? 

To enter into a Scheme of Arrangement, an application, a claim form and supporting evidence must be filed at the High Court. The application will be for an order summoning the members and/or creditors in a manner that the court directs. The application may be made by the company, a creditor of the company, a member of the company, the liquidator of the company or the administrator of the company. 

The court will firstly consider whether the proposed Scheme of Arrangement is likely to be approved and if it considers it likely, will provide for an order to convene a meeting. Once the order has been made, the company will notify the members and creditors of the company so as they may consider the Scheme of Arrangement and then at the meeting (typically 21 days’ notice of the meeting is given), vote on whether to approve the scheme. To pass, the vote required at least 75% of the creditors to vote in favour (that is 75% in value of each class of creditors, being the majority in number of each class). Following the vote, the company will ask the court to approve the scheme. The court will consider, before it gives final approval, whether it is fair. The approved scheme becomes effective on the delivery of the court’s order sanctioning the scheme to Companies House. The scheme will be binding on all creditors.  

It should be noted that the procedure varies if the scheme involves a reduction in capital. Depending on the contents of the scheme, it may require compliance with the Takeover Code, the Prospectus Rules and/or the Listing Rules as well as requiring FCA approval. 

What are the advantages of a Scheme of Arrangement? 

1. Time. Dependent upon various factors including the availability of the court, a Scheme of Arrangement can be completed in a short time period, from as little as two months from the date of the application to the court. 
2. Costs. The costs of a Scheme of Arrangement can be considerably less than other options. 
3. Control. The directors of the company retain control of the company and its assets during the process. The company can continue to trade. It may also provide the company with an opportunity to restructure and/or re-evaluate the business. 
4. Legally binding. Once the court has approved the scheme, it is legally binding on all parties, including the creditors (unlike in a CVA). 
5. Brand reputation. A notice of the scheme will not be published in the London Gazette or with any other media and so it is more discrete and less likely to damage the reputation of the company. 
6. Reporting requirements. The directors of the company which employ a Scheme of Arrangement are exempt from the reporting requirements of the Company Directors Disqualification Act 1986. 
7.  Flexibility.  It is possible for the terms of the agreement to be flexible dependent upon the needs of the company and its creditors.  

 What are the disadvantages of a Scheme of Arrangement? 

1. Court involvement. Whilst a Scheme of Arrangement can be relatively quick, it does involve the court and so there is a statutory process to be followed which can be process heavy. Further, the scheme cannot be approved without the approval of the court even if all parties agree. 
2. Jurisdiction. The Scheme of Arrangement is unlikely to be recognised outside of the courts of England & Wales so it may not be as effective if the company has international creditors or subsidiaries. 
3. Protection against legal action. There is no automatic moratorium granted on the sanctioning of the Scheme of Arrangement to prevent other actions of creditors, for example seeking a winding up order. However, a company may also seek to enter into administration at the same time to gain protection whilst the scheme is being agreed. 

Liquidation 

What is liquidation?  

Liquidation is the legal process which involves the winding up of a company and is therefore usually the last available option. There are three types: 

1. Compulsory liquidation: Initiated by creditors via a winding-up petition. Typically, HMRC, due to unpaid tax and VAT will be involved as a key creditor. 
2. Creditors Voluntary Liquidation (CVL): Directors voluntarily liquidate the company. 
3. Members Voluntary Liquidation (MVL): Shareholders liquidate a solvent company. 

The process for each type of liquidation varies. 

How does a company enter into compulsory liquidation? 

A creditor will petition the court with a winding up petition. A copy of the petition will then be served on the company, and a notice of the petition will be placed into the London Gazette. The company will then have the opportunity to oppose the petition at a court hearing. The judge may either make a winding up order or dismiss the petition.  

Alternatively, a member of the company can apply for a just and equitable winding up. A petition can’t be presented however if the company is insolvent. The court can exercise its discretion and grant an order winding up a company as a last resort, often as a result of a breakdown in mutual trust and confidence between shareholders in a shareholder’s dispute which cannot otherwise be resolved.  In making such a decision, the court will consider the application subjectively and considering the equity of the outcome and whether such an order may be against the interests of one or more of the shareholders. 

Should the judge make an order for the winding up, an IP will be appointed to liquidate the company and manage the insolvency process. They will also be responsible for notifying the creditors of the liquidation.  

The IP will identify the assets of the business and then liquidate them (i.e., sell them) in order to pay any outstanding debts, in order of priority (as per the Insolvency Act 1986). Should the assets not be sufficient to repay the debts, they will be written off, unless secured by a director’s personal guarantee or there is found to be other wrongdoing by the directors. Should any assets remain, they will be distributed amongst the shareholders. 

Once this process is completed, the company will formally cease to exist; it will be wound up and removed from the register at Companies House. 

 What are the advantages of liquidation? 

1. Protection against further action. Once the company has entered into liquidation, the creditors will not be able to take any further action to recover the debts due. 
2. Time. Liquidation provides for time to realise the assets of the company and therefore the creditors to receive the best possible return. 

 What are the dis-advantages of liquidation? 

1. The company will cease to exist. As soon as the company enters the liquidation process, it must cease trading. The company will be formally wound up and removed from the register at Companies House. The only way to stop the process is to pay the debt or to get the petitioning creditor(s) to withdraw the petition. 
2. Director investigations. The liquidator is tasked with identifying any misconduct or wrongdoing which may have contributed to the company’s insolvency. The liquidator will therefore investigate the conduct of the directors of the company and will report the findings to the UK Secretary of State. Should the practitioner find evidence of wrongdoing, the director(s) may face a fine, disqualification, criminal prosecution or even be held liable for the debts of the company (see the BHS case and judgment as an example of such charges). 
3. Personal guarantees. If a director provided any personal guarantees, once the company is placed into liquidation, the creditor(s) may call upon those and the director may be held liable to the extent of the guarantees for those debts.  
4. Time. Once a liquidator has been formally engaged, they will begin to act immediately, and the company can be placed into liquidation within a matter of weeks. However, depending upon the size and the complexity of the company, the liquidation itself can take a significant amount of time.  

Facing insolvency can feel overwhelming, but understanding your options is the first step toward regaining control. Whether your company is aiming for recovery or an orderly winding down, knowing the available procedures, and their implications, can help you make informed, strategic decisions.