Insolvency And Bankruptcy

Question 1

Define insolvency

Answer 1

A financial state in which a company can no longer pay bills and other obligations on time.

1. Occurs when liabilities or debts exceed assets and cash flow.
2. When a company becomes insolvent, it must take immediate action to generate cash and settle or renegotiate current debts
3. Companies that cannot successfully recover from insolvency often face bankruptcy proceedings, receivership or liquidation of all of their assets

Question 2

Define liquidation/ winding-up

Answer 2

Liquidation/ winding-up is the legal process through which a company’s existence is brought to an end, and its assets are administered for the benefit of creditors and members.

1. The process involves closing down the company and managing its remaining assets and liabilities.
2. A liquidator is appointed to take control of the company, collect all assets, settle debts, and distribute any surplus to shareholders (if applicable).
3. Once the process is complete, the company is dissolved and removed from the Register of Companies, meaning it no longer legally exists.
4. The terms liquidation and winding-up are interchangeable, both referring to the formal process of ending a company’s operations.

Question 3

Define bankruptcy

Answer 3

Bankruptcy applies to individuals rather than companies. It is a legal declaration that an individual cannot pay their debts, leading to asset distribution among creditors under court supervision.

Question 4

What are the alternatives to liquidation?

Answer 4

1. Administration
   A. An administrator is appointed to run the company’s affairs
   B. They aim and attempt to rescue the company by restructuring its debts, operations, or management.
   C. If full recovery is not possible - administration may still help achieve a better outcome for creditors than immediate liquidation.
2. Voluntary arrangements
   A. A legally binding agreement between the company and its creditors to restructure debts and allow the company to continue trading.
   B. Insolvency proceedings are avoided if creditors agree to a repayment plan that helps the company recover financially.
   C. The agreements provide breathing space for a company to settle financial difficulties without being forced into liquidation.
3. Note: People owed money (creditors) by a company in liquidation have to make a formal claim to recover their money

Question 5

Insolvency vs Bankruptcy

Answer 5

Both occur and liabilities exceeded assets BUT,

1. Insolvency is a state of being (recoverable)
2. Bankruptcy is a matter of law.
3. Companies can be insolvent but not legally bankrupt.
4. Insolvency can lead to bankruptcy but, the condition may also be temporary and fixable without legal protection from creditors

Question 6

Who can apply for bankruptcy?

Answer 6

1. Individuals, sole traders, and partnerships can apply to the court to declare bankruptcy.
2. Creditors can also apply for someone’s bankruptcy if they are owed more than £5,000.
3. Companies and partnerships have different bankruptcy procedures.

Question 7

What happens after a bankruptcy is declared?

Answer 7

1. The official receiver takes control of the bankrupt person’s financial affairs.
2. If the person has significant assets, an insolvency practitioner (trustee) is appointed.
3. The trustee sells valuable assets to repay creditors as much as possible.

Question 8

What is an alternative to bankruptcy - Individual Voluntary Agreement (IVA)?

Answer 8

1. A debtor (owes money to creditor) can propose an IVA to avoid bankruptcy.
2. A creditors’ meeting is held, and at least 75% of voting creditors must agree.
3. If approved, creditors cannot take legal action to recover the debt.
4. The debtor makes monthly repayments, including fees, as part of the agreed plan.
5. An insolvency practitioner reviews the debtor’s finances annually and reports to creditors.