The most common formal procedures for companies are:

Liquidation
Administration
Administrative receivership
LPA (fixed charge) receivership
CVA (Company Voluntary Arrangement)

Those for individuals are:

Bankruptcy
IVA (Individual Voluntary Arrangement)

Those for partnerships are:

Liquidation
Administration
LPA receivership
PVA (Partnership Voluntary Arrangement)

Liquidation (also known as winding-up)

Compulsory

This is started by the issue by a creditor of a winding-up petition in the Companies Court in London or a local County Court. If an order is made, the liquidation dates back to the date the petition was issued: I.A. s.129. All dealings by the company after a petition has been issued are void unless validated by the Court: I.A. s.127.

Creditors’ voluntary

This is started by a resolution passed by the shareholders that the company should cease trading and go into liquidation. A meeting of creditors is then convened and the creditors have the right to nominate the liquidator. Liquidation is effective from the date of the resolution: I.A. s86.

Members’ voluntary

This is started by a statutory declaration by the directors that, having made full enquiry, they had formed the opinion that the company would be able to pay its debts in full within 12 months: I.A. s.89.

Apart from special circumstances, neither of the voluntary procedures involves the court. English law operates the principle of universality. A liquidator appointed in England has power to collect assets owned by the company all over the world and its obligated to accept proofs of debt from overseas creditors. When a company goes into liquidation, a statutory trust is imposed over all its assets whether in the U.K. or overseas in favour of creditors.

A fundamental principle of English insolvency law is the pari passu rule. Meaning on an equal footing or proportionately. This means that all creditors are entitled to payment of their debts in shares proportionate to their respective claims usually by way dividend.

There is however a large number of exceptions which mean in practice that unsecured creditors often receive nothing. The order of priority of payment of debts is known as ‘the statutory scheme’. On liquidation, there is a mandatory set-off of all mutual credits, mutual debts or other mutual dealings (I.R. 4.90)

Receiverships

Receivership is one way by which a secured creditor can enforce its security. In most cases, this is done without reference to the court. The court does have power to appoint receivers but this is comparatively rare, e.g. where assets are at risk. The powers of the receiver depend upon whether he has been appointed under a fixed charge or a floating charge.

A fixed charge receiver (sometimes called an LPA receiver) derives his powers from the fixed charge itself and Law of Property Act 1925, s.109.

By contrast, a receiver appointed by the holder of a floating charge is called an administrative receiver and has very wide powers overriding those of the directors. These powers include:

To collect and get in the company’s property
To bring or defend proceedings in the company’s name
To carry on the company’s business (I.A. Schedule 1).

A fixed charge is a security under which the debtor cannot deal with the asset in the ordinary course of business.

A floating charge is a security which charges assets present and future, allows the assets to change from time to time, and allows the company to dispose of the charged assets in the ordinary course of business.

Lenders typically take fixed charges over land, fixed plant and machinery and book and other debts. They may take floating charges over stock, other receivables and the company’s undertaking.

The appointment of an administrative receiver (AR) takes effect as an equitable assignment to the holder of the floating charge of all the assets comprised in that charge. ARs only have power to deal with the charged assets by asserting the charge-holder’s title as assignee.

ARs act as agent for the company unless the company goes into liquidation (I.A. s.44) or they enter into a new contract without excluding personal liability.

‘The agency of a receiver is not an ordinary agency. It is primarily a device to protect the mortgagee or debentureholder…The relationship set up by the debenture and the appointment of a receiver….is tripartite and involves the mortgagor, the receiver and the debentureholder. The receiver is appointed by the debentureholder…and becomes the mortgagor’s agent whether the mortgagor likes it or not. And, as a matter of contract between the mortgagor and the debentureholder, the mortgagor will have to pay the receiver’s fees. Further the mortgagor cannot dismiss the receiver since that power is reserved to the debentureholder…it is to be noted also that the mortgagor cannot instruct the receiver how to act in the conduct of the receivership. All this is far removed from the ordinary principal and agent situation’.

ARs owe duties to the charge-holder, the company and guarantors to obtain the best price but they do not owe a general duty to the company’s creditors.

Administration

This was new procedure introduced by I.A. s.8. It is normally started by the issue of a petition by the company or its directors (or, rarely, by a creditor) accompanied by a report prepared by an insolvency practitioner. However, since the Enterprise Act 2002, the holder of a floating charge may make an appointment out of Court, as may the company itself or the directors.

The three possible grounds for an administration order, to be pursued in descending order are:

1...The survival of the company as a going concern;

2...The more advantageous realisation of the company’s assets than· would be effected on a winding up (without first being in administration);

3...If the above are not reasonably practicable, the making of a distribution to· one or more secured or preferential creditors, provided this is not done with· unnecessary harm to the interests of creditors as a whole.

The test is whether on the evidence, there is a real prospect of one or more of these objects being achieved. The Petition can be issued or the appointment made when the Company is or is likely to become unable to pay its debts.

Note the important consequences of an administration application/appointment.

proceedings can be started or continued against the company without the consent of the administrator or leave of the court (including arbitrations)
No security can be enforced against a company’s assets without the consent of the administrator or leave of the court.

Security is defined as including a hire purchase agreement or a retention of title agreement (I.A. s.251).

Bankruptcy

Applies only to individuals. A petition for a bankruptcy order can be presented by:

The individual himself
A creditor
A supervisor under the individual’s voluntary arrangement
The Official Petitioner after a criminal bankruptcy order has been made

The minimum sum on which a petition can be based is £750. The court has power to dismiss the petition if the individual can pay all his debts or:

The individual has made an offer to secure or compound the debt; and
The acceptance of that offer would have required the dismissal of the petition; and
That the offer was unreasonably refused (I.A. s273) e.g. IVA pending

A bankruptcy normally lasts one year but the court has powers to extend the period in certain circumstances.

Individual Voluntary Arrangements

An IVA is an alternative to bankruptcy. It involves the debtor making a formal proposal to his creditors. This stays further proceedings or executions pending a report from an insolvency practitioner whether the proposal is worth summoning a meeting to the creditors to consider.

If a meeting is held and more than 75% in value of those voting are in favour, the IVA without or without amendments is approved and binds all creditors present or who had received notice of the meeting. This can be a pragmatic and practical way out for both the debtor and his creditors: the debtor avoids bankruptcy and the creditors often get a higher dividend than they would have got on a bankruptcy.