If a company is in financial difficulties, there are alternatives to liquidation as detailed below. One of the main differences between these insolvency proceedings and liquidation is that once these insolvency proceedings are completed, the company is still 'alive', i.e. there is usually no automatic dissolution of the company. Therefore, it may be that a company can be subject to one or more of these insolvency proceedings, and then go into liquidation. 

Administrative Receivership

What does receivership mean?

Receivership usually refers to where an administrative receiver has been appointed to a company. Someone like a bank who is owed money usually appoints the administrative receiver, and the receiver’s job is to find the best way for the bank to get its money back.

A charge over the assets of the company to secure a debt is required before an administrative receiver can be appointed.

When a company borrows money, typically from a bank, the company can grant a debenture to the creditor, which is a document giving the creditor a charge over the company's assets and business. If the company is in financial difficulties, the debenture holder can decide to appoint an administrative receiver under the terms of the debenture, and the administrative receiver is responsible for assessing the company's financial situation, and deciding how best the creditor can recover his money.

Where an administrative receiver has been appointed, a company is known as being in administrative receivership. The administrative receiver may decide that the company should cease trading and its assets sold on a piecemeal basis; that the company should be sold as a going-concern; that only part of the company should be sold; or that it should continue trading under his supervision, etc.

The administrative receiver must be an insolvency practitioner.

Enterprise Act 2002

The changes brought in by the Enterprise Act 2002 mean that the holders of a floating charge created after 15 September 2003 will not be able to appoint an administrative receiver, except in connection with floating charges granted in relation to certain transactions in capital markets, public/private partnerships, utility projects, project finance projects, financial markets and registered social landlords. Holders of a floating charge created after 15 September 2003 can appoint an administrator. 

Floating charges created before 15 September 2003

Holders of floating charges created before the Enterprise Act came into force on 15 September 2003 are able to choose to appoint an administrative receiver or an administrator.

Company Voluntary Arrangement (CVA)

If a company is in financial difficulties, it may attempt to enter into a CVA. The company proposes an arrangement for repaying creditors, and a meeting of creditors is held for the creditors to vote whether to accept the proposal. If a majority in excess of three-quarters in value of creditors present (in person or by proxy) accept the proposal, all creditors are bound by the arrangement. The CVA is managed by a supervisor. An example of a CVA is where a company pays £30,000 per year to the supervisor for 5 years, and the supervisor distributes the money to the creditors.

The effect of a CVA is that such creditors cannot commence action against the company to recover money owing, unless the company fails to fulfil the terms of the CVA, e.g. does not pay the £30,000 each year, and the CVA is deemed to have failed.

The supervisor of a CVA must be an insolvency practitioner.

The CVA comes to an end either when the arrangement has been completed, or when the CVA is deemed to have failed.

The Insolvency Act 2000 introduced a new procedure to enable a small company to obtain an initial moratorium where a CVA is proposed. A moratorium provides a breathing space to allow time for the directors of a company to put the CVA proposals to creditors. It prevents the company’s creditors from proceeding against the company during the relevant period, whilst allowing the directors to remain largely in control of the company and its business.

A small company is one which fulfils two of the following three conditions:

(a) turnover less than £5.6 million;

(b) balance sheet total less than £2.8 million; and

(c) having fewer than 50 employees

These provisions exclude not only companies which are not small companies within the meaning of the Companies Act 1985 but also certain companies involved in insurance, banking and other financial market or project finance activities.

A company is also excluded from being eligible for a moratorium where it is already in administration, liquidation (including provisional liquidation) or administrative receivership as protection from the actions of creditors is provided by these procedures. In addition, the option of a moratorium is not available where a company currently has a CVA in effect or has already had a moratorium in the previous 12 months and the proposed CVA did not come into effect or ended prematurely.  

The moratorium is obtained by filing certain documents at court without the need for a court hearing. A moratorium comes into force when the documents are filed at court and usually ends at the end of the day on which the creditors’ meeting is held.

Administration

Administration is managed by an administrator, who is an authorised insolvency practitioner appointed to manage the affairs, business and property of a company. He/she will be an officer of the court and must perform his/her functions with the objective of rescuing the company wherever possible.

The Enterprise Act 2002 revised the administration procedure. The revised administration procedure puts rescue at the heart of the administration – where companies can be saved, they should be saved. The first objective of the administrator must be to consider rescuing the company. This means rescuing the company as a going concern with all or most of its businesses intact – it does not mean ending up with the legal shell of the company. This new emphasis on company rescue in administration will help to ensure that viable companies are preserved and jobs are safeguarded.

Administration effectively protects the company from any action by creditors to recover money for a limited period, e.g. a creditor cannot petition for the winding up of a company whilst it is in administration.

Purpose of Administration

There are three objectives – 

• Company rescue (as a going concern) being primary. 
• If that is not possible (or if the second objective would clearly be better for the creditors as a whole), the administrator can achieve a better result for the creditors than would be obtained through an immediate winding-up of the company, possibly by trading on for a while and selling the business/businesses as a going concern. 
• Only if neither of these objectives is possible, can he realise property (sell assets to somebody) to make a distribution to secured and/or preferential creditors. 

In addition to the court order entry into administration, the Enterprise Act 2002 introduced "without court order" appointment routes for holders of qualifying floating charges and companies/directors that are quick and do not need a court application or hearing. The administrator is still an officer of the court and the relevant documents filed with the court, but the appointment is effective from the date and time that a notice of appointment is filed with the appropriate court. 

Companies and directors can only appoint an administrator through the relevant “without court order” route if the company has not had the benefit of a moratorium (or interim moratorium) within the previous 12 months. This prevents administration being used as a quick and easy way of holding off creditors whenever things get difficult.  

Time limits

The Enterprise Act 2002 introduced an overall time limit of one year for an administration, although this can be extended by the consent of the creditors and/or by the court. The administrator is also required to do everything as soon as reasonably practicable and the time-limits for getting his proposals out to creditors, and holding the initial creditors' meeting are eight and 10 weeks respectively, although these can also be extended with the creditors' consent and/or by the court. 

Endings

The Enterprise Act introduced specific, finite endings, which enable the administrator to move the company from administration straight into a creditors’ voluntary liquidation (where there are assets to be distributed to unsecured creditors) or to dissolve the company (where it has no property left to distribute to creditors), on the registration of the relevant notice by Companies House.