Company Insolvencies

Company Insolvencies

Insolvencies are on a downtrend in England and Wales. The data compiled by the Insolvency Service, an executive agency of the Department of Trade & Industry shows a clear downtrend in insolvencies. The company liquidations, comprising compulsory liquidation and creditors voluntary liquidation, in England and Wales fell from 16,305 in 2002 to 12,192 in 2004.

Insolvency refers to the inability of a company to repay its debts. Insolvencies in UK are subject to the provisions of the Insolvency Act of 1986. Insolvency has become a synonym for bankruptcy worldwide. In UK, however, insolvencies relate to companies and bankruptcy to individuals.

Insolvencies fall into two categories:

• Compulsory liquidation
• Creditors voluntary liquidation.

A compulsory liquidation results from a compulsory winding up order obtained by a creditor from the court. It is conducted by an official receiver or an insolvency practitioner.

A creditors voluntary liquidation, meanwhile, results from a resolution passed by members or directors, subject to the approval of creditors, to wind up a company.

The members voluntary liquidation is mistakenly believed to be another type of insolvency procedure. However, members voluntary liquidation relates to solvent companies only. A company could be wound up for reasons other than insolvency such as disagreement among members or financial losses. A loss-making company is not insolvent as long it is able to repay its debt.

A company, which is unable to discharge its financial obligations, has other options besides winding up. These options, however, are suitable for companies that can be rescued through a reorganisation. Such companies can avail of two options: company administration orders and company voluntary arrangement. In the first option, the creditors are restrained from moving against the company and an administrator is appointed by the court to put forth proposals for resolving the financial difficulties of the company. The Enterprise Act 2002 introduced revisions, which have opened up additional routes to administration not involving an administration order. The company voluntary arrangement, meanwhile, allows a company to strike a legally-binding agreement with creditors. For instance, a company could persuade a creditor to write off a portion of debt or defer interest payments.

The last option for insolvent companies is administrative receivership. The administrative receiver unlike an administrator does not put forth proposals for saving a company. An administrator receiver is appointed to pay off fixed or floating interest rate debenture-holders by selling the company's assets.

The Insolvency Service is the key agency in compulsory liquidation. It administers and investigates companies and partnerships in compulsory liquidation. The goal of the Insolvency Service is find out the reasons behind insolvencies and report incidence of misconduct if any. The official receivers and insolvency practitioners also play an important role in compulsory liquidation. The official receivers are either employees of the Insolvency Service or officers of the court. Insolvency practitioners include accountants and solicitors from the private sector.

The incidence of insolvencies varies from sector to sector. Data shows that insolvencies are higher in services as compared to other sectors. The financial and business services excluding insurance accounted for a majority of insolvencies in the services sector. Insolvencies are also high in construction and transport.

Insolvency is a complex field involving a number of procedures. The government policy towards insolvencies has been pragmatic: soft on genuine failures and hard on fraud and misconduct. Insolvencies are a part of business and a constant reminder of the truth that only the fittest survive in business.