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There is a lot of confusion about what the term “insolvency” actually means.  Terms such as bankruptcy, liquidation and administration are liberally referred to in the media but are often incorrectly applied or not adequately explained. So what is insolvency?

You can be insolvent as an individual or as a Company.  Insolvency occurs when an individual or company can no longer meet financial obligations.  As an individual that would mean that you cannot pay your debts when they are due.  So if you are unable to meet monthly obligations to institutions who have lent you money (for example a mortgage or credit card company) you may be insolvent by definition.

As a Company, there are two tests.  The first is cash flow insolvency.  This is similar to the individual test.  So a Company does not have enough liquid cash to pay its creditors when its invoices fall due even though it does have assets on its balance sheet (such as property or stock).

The second test for a company is balance sheet insolvency.  A company would be considered insolvent on a balance sheet basis if the company debts are greater than its total assets.  All assets are considered in the analysis, liquid or otherwise.

So what does it mean to file for Insolvency?  While Insolvency is the state of financial distress in respect of an individual or company based on these tests, filing for insolvency is the legal process pursued in Court in the form of proceedings with the purpose of liquidating the assets in order to pay off the outstanding debts.

This is where the terms bankruptcy, liquidation and administration come in.  These are the legal processes that follow on from insolvency.  Filing for Bankruptcy applies to individuals while Liquidation and Administration applies to companies.  Where companies are concerned, Liquidation is appropriate where the financial distress is so extreme that the only option is to close the business while Administration, by comparison, might be used where some parts of the distressed Company might be saved.

The individual or the Company may choose to file for insolvency themselves or a creditor who has lost patience may commence the legal process.  So being insolvent does not automatically mean that bankruptcy, liquidation or administration will follow.  These legal processes will only occur when someone takes the ultimate step to file for insolvency as a result of the financial distress experienced by the ‘insolvent’ individual or Company.

For further advice and guidance on insolvency and the legal processes that might follow from insolvency…Talk to Tollers on 01604 258558 and ask to speak to the specialists in our commercial services teams who will be happy to help.

Th UK Insolvency Law

Insolvency And Corporate Recovery – Tollers Solicitors

Landlords will welcome a recent Court of Appeal decision that means they can recover rent from an administrator of a limited company tenant in administration, whenever the administrator was appointed.

The objective of an administration is to try to rescue the company and prevent it going into liquidation so an administrator will usually try to ensure the company continues trading.

If the company leases premises and the rent payable is an expense of the administration, it will (almost always) be paid in full to the landlord before money is paid to other creditors of the company. The landlord has priority, including over the administrators’ own remuneration and expenses (although not over claims under a fixed charge). However, if rent payable is not treated as an expense of the administration, but merely as a provable debt, the landlord ranks as an unsecured creditor with no such priority and will often not receive any rent.

In an important case in 2012, the High Court said rent that had fallen due before an administrator was appointed – for example, quarterly rent payable the day before an administrator was appointed – was not an expense of the administration. Therefore, it did not have to be paid in priority over other creditors, even if the administrators went on to trade from the premises for all or part of the remainder of that quarter.

Following that decision, many administrators made sure they were appointed the day after the date when a quarterly rental payment fell due, so they did not have to treat the payment as an administration expense.

However, in a new case involving £3m of unpaid rent the Court of Appeal rejected the administrator’s argument that as he was appointed the day after the rents became due, they were not an administration expense. Reversing the previous High Court decision, it ruled that:

Administrators must therefore now make rental payments for as long as they keep possession of premises for the benefit of the administration – ie on a ‘pay as you go’ basis. The rent is treated as accruing from day to day and is payable as an administration expense.

This ruling will apply equally to liquidators in the winding up of a limited company.

Recommendation

Case refs:     Goldacre (Offices) Ltd v Nortel Networks UK Ltd [2009] EWHC 3389

Leisure Norwich (II) Ltd and others v Luminar Lava Ignite Ltd (in administration) and others [2012] EWHC 951 (Ch)

Pillar Denton & Others v. Jervis & Others [2014] EWCA Civ 180

The two most important times in a company’s life are generally at the very start and end of its existence. It is at these critical times that directors often require guidance and support from a range of advisers. Accountants, Business Recovery specialists, Tax Advisers and most importantly Solicitors are needed.

The correct company structure should be one of the first issues addressed with Solicitors and other advisers. It is essential that the company structure allows for the right amount of flexibility whilst providing sufficient protection for those forming the company. Tollers have advised numerous organisations on the correct company structure and are happy to work in conjunction with advisers to achieve this.

Once the company structure has been decided, it is key that the documentation formalising the structure of the company, such as a shareholder agreement, is clearly drafted to minimise the risk of disputes occurring at a later stage. Failure to have detailed documentation governing the company could present a serious risk to its success.

With the boom in internet trading and the possibilities of reaching a wide market through the web, it is highly likely that use of a website will feature in any new company’s business plan. There are a number of areas to consider with the use of a website, from protection of intellectual property to drafting terms of use and a cookie policy.

It is also vital at the start of a company’s life that a comprehensive set of terms and conditions are in place to govern the company’s relationship with its customers. Tollers have assisted a number of company’s in Milton Keynes with the drafting of clear and concise terms and conditions, always taking an active approach in ensuring the client’s business is fully protected.

The end of a company’s life may come about in a variety of ways. Many companies are acquired by other companies who wish to increase their market share or expand into new areas of business. Where companies have struggled financially, often due to a customer going out of business, there are options to sell parts of the company through an insolvency process, to restructure the company or negotiate preferable payment terms with creditors to enable the company to continue trading.

Alternatively, a company may be forced into a formal insolvency procedure as a result of a dispute. Failure to pay creditors is the most common cause, however director and shareholder disputes are becoming increasingly prevalent in these straightened times. An attempt to wind up the company can be the last resort by parties to a dispute. However early advice, support and intervention can result in a better outcome for the parties involved.

Tollers have recently settled two large shareholder disputes which would have resulted in the companies being placed into administration or compulsory liquidation if the dispute had not been resolved. In both cases a creative approach to settlement has resulted in the businesses being able to continue to trade.

A company’s life may not come to an end as a result of financial issues. It may be due to a director wishing to retire or the need to use tax efficient methods to extract company funds. Solvent liquidations are becoming more popular. Those wishing to close down a company and ensure that outstanding liabilities are dealt with often opt for a liquidation, either solvent or insolvent, which has the benefit of creating a clean break for directors and shareholders alike.

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