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Insolvency at a glance

As part of its guidance to businesses on the different stages of recovery, ICAEW provides an overview of what the term insolvency means in reality for companies, the roles of the Official Receiver and Insolvency Practitioners and the different types of creditors.

Insolvency describes a situation when a company (or individual) can’t pay what they owe on time, or when the value of their assets is less than the money they owe.

The law (mainly the Insolvency Act 1986) sets out formal legal processes for insolvent companies. Not every business with a debt problem ends up needing a formal solution.

An Insolvency Practitioner (IP) is appointed under the law to perform a specific role in formal insolvency procedures. There are different types of insolvency procedure for businesses, including: company voluntary arrangements (CVAs), administration, liquidation and receivership. Which route is taken depends on a combination of factors.

IPs sort out difficult situations for organisations including sole traders, businesses, partnerships, limited liability partnerships and limited companies. They offer guidance to try and rescue a business. If that’s not possible, they may be appointed to handle a formal insolvency.

The work of an IP involves dealing with often-competing interests, but their main duty is to look after creditors’ interests. In some cases, the IP will give advice to a company in financial difficulty before a formal process begins. On other occasions it is possible that a company’s bank might ask the IP to conduct a review of its viability.

The principle in insolvency procedures is that any funds available should be distributed fairly between creditors. Creditors in the same category receive an equal percentage of what they’re owed.

The IP must comply with the law and can’t decide who to pay first. Some creditors are classified as secured or preferential and are paid before other, unsecured (or ordinary) creditors from certain categories of assets.

Secured creditors are creditors who hold a fixed charge or security on an asset, or a debenture over a company’s assets, and have the right to sell these assets to recover debt. Preferential creditors are employees owed any money. HMRC used to be preferential, but isn’t any more. Everyone else is what is usually called an unsecured creditor.

The Official Receiver is a civil servant working for the Insolvency Service, dealing with investigations on compulsory liquidation cases. In some cases an IP won’t be appointed and the Official Receiver will deal with all aspects of the liquidation.

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