The term insolvency can be seen being used by individuals and companies. For the individuals, it is popularly stated as a bankruptcy. But when it comes to the company, it is termed as corporate insolvency. Other than different terminology, there are various rules to it. In some parts of the world, going bankrupt mainly means sending an application to the court. For the firms, there are different rules applicable as corporate insolvency relies on company law. According to the insolvency and bankruptcy code, the firm will be stated as insolvent if it fails to pay the debt it has on its head. Primarily, there are two tests to determine if the firm is insolvent.
- The first one is the cash flow test. You have to check if the firm’s present debt or the future ones fail to pay off within the due time.
- Another way is checking the balance sheet test. Do you think that the value of a firm’s assets is less than the number of liabilities after taking in the present uncertain scenarios and future based liabilities?
In case, the answers are positive to any of these options, then your firm is termed to be insolvent. The company is unable to pay debts if the court order has not been sorted out yet. It can also prove to be insolvent if the creditors have served formal demand for the undisputed sum at the registered office of the firm and debt fails to get paid for 3 weeks.
Learning about the procedure now:
Your firm might be placed into the field of formal insolvency process by not just you, but even by your creditors, shareholders or the court. As the firm over here nears insolvency, there are four significant processes by which the firm might be rescued potentially or wounded down and the assets get distributed.
- Those four major processes over here are administration, liquidation, company voluntary arrangement, and Administrative Receivership.
- No matter whichever one is for the firm, it will always be run under control of the insolvency practitioner, as appointed for its qualification and license to carry out the current insolvency procedure.
Understand the meaning behind company voluntary arrangement:
A company voluntary arrangement also called CVA is noted as the binding agreement, which is placed between creditors and company. The director along with the fellow directors will be the one to initiate CVA. However, if appointed already, liquidator or administrator might also propose it.
- Under the current CVA, the creditors can always agree to reduce or just reschedule debt arrangement in just return for a commitment by the firm to just restructure business affairs under the new form of business development strategy.
- This process is here to take place under the proper supervision of the insolvency practitioner, appointed for this task. Here, the directors are given the chance to submit a report on the finances of the firm together with a proposal for just reducing debt.
- You and your fellow directors will be the ones to propose that every creditor will accept around 50% of the money as owed to each one of them and also to spread repayments over a number of years or months.
- The agreement and procedure will be regulated legally and must allow the firm to carry on with the trading services well.
Understanding the real meaning behind administration in this regard:
The administration is primarily noted as the rescue procedure of the firm under which the assets will get protected by stopping any form of the creditor action. However, this is mainly done for the benefit of all creditors and not just for you. With the help of this process, a qualified bankruptcy law lawyer or insolvency practitioner will be replacing the director and the entire board of directors, as well.
- After that, it is time for the administrator to rescue the firm in the interest of creditors and not act so to unfairly harm creditor’s interest.
- The administrator should procure better results for creditors and exercise some proper business judgments.
- He should carry out the functions quickly and efficiency as it is practiced reasonably.
- If everything else fails to rescue the firm, it is time for the administrator then to effect an orderly winding up and then distributing assets.
Going through the points, it can be clearly proved that the administrator will have wider discretion to do what he thinks as the best alternative during such crucial stages. They are the one to decide whether to save the company or just sell it, or just wind it down. For that, an administrator can perform multiple tasks. He is the one to design restructure proposal, and then provide it to the registrar and unsecured creditors within a span of 8 weeks. Later, a creditor vote will then follow for approval where a simple majority is needed. Learning about insolvency is important, mainly from the company’s perspective here.
Amy Jones has been serving as an experienced legal content writer in Ahlawat & Associates, who is related to company law appellate tribunal. She is a passionate writer and always on the lookout for opportunities for sharing her knowledge with legal community. Follow her company on various social media networks like: Twitter, Facebook and LinkedIn.