Note on Meaning and procedure of insolvency of company

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Meaning and procedure of insolvency of company

Incapacity to pay debts upon the date when they become due in the ordinary course of business is known as insolvency. The condition, which individual property and assets are inadequate to discharge the person's debts. Insolvency is a condition of having more debts (liabilities) than total assets which might be available to pay a creditor, even if the assets were mortgaged or it is sold. It is a determination by an insolvency court that a person/ business cannot raise the funds to pay all of his debts. The court will then "discharge" some or all of the debts, leaving those creditors holding who has given a sum of amount and not obtaining what is owed them. The supposedly insolvent individual debtor, even though found to be insolvent, is allowed certain exemptions, which permit him to retain a car, personal property, business equipment, and often a home as long as he continues to make payments on a loan secured by the property.

  • Lack of financial resource
  • Become unable to pay debt
  • A financial condition in which total liability of a company exceeds the total assets, so they claim of creditors cannot be paid.

The following is a brief summary of insolvency procedures.

  • Administration

The administration will have one of three purposes. These, in order of desirability, are as follows:

  • To rescue the company as a going concern – as against to selling its business and leaving a “shell”.
  • To achieve a better result for the creditors as a whole than if the company was wound up.
  • To sell the business or its assets in order to pay the secured and/or preferential creditors (e.g. employees owed wages/holiday pay and so on).

Administrators can only go for opt, the second purpose if they think that the first is not likely to be achieved or is not the best interests of the creditors as a whole. They may not seek to achieve the third (fallback) purpose unless they think, neither primary nor secondary purpose is likely to be achieved and no unnecessary harm will be caused to the interest of creditors as a whole.

The advantages of an administration order are that, without the consent of administrator or leave of the court:

  • A company cannot be wound up.
  • No legal proceedings can be taken against a company.
  • A receiver cannot be selected and no other steps can be taken to enforce any security.

Once an administrator has been appointed they will ratify the management of a company. This will relieve the directors from taking the critical day to day decisions and therefore, minimize any sorts of a risk of liability from that point on.

Three methods of appointing an administrator are explained below:

1. Appointment by the court:

A company, its supervisor or one or more creditors can apply to the court to appoint an administrator. The court may appoint an administrator only if it is fulfilled that a company is, or is likely to become, unable to pay its debts and that the administration order is reasonably likely to accomplish one of the three potential purposes explained before.

2. Appointment by the holder of a qualifying floating charge (QFC):

The holder of a qualifying floating charge held over a company’s property can appoint an administrator without an application to a court. In order to appoint an administrator the qualifying floating charge must be chargeable, i.e. the charge holder must be designate to call in their security.

3. Appointment by the company or its directors:

A company or its supervisor may appoint an administrator without a court order – i.e. making an “out of court” appointment. They will, however, be unable to do so if within the previous 12 months of the appointment any of the following applied:

  • Administration had come to an end at the behest of the company or its directors the company had been in administration but that A voluntary arrangement had ended too early.
  • A moratorium had ended without a voluntary arrangement being legalized or approved.

Company Voluntary Arrangements (CVAs)

A Company Voluntary Arrangements (CVAs) is an arrangement where, the company continues to trade even after reaching an agreement with its creditors in satisfaction of its pre-existing debts, usually for a percentage of their nominal value. It can be used in cases where a liquidator or an administrator has already been taken an appointment. The directors propose the adjustment and put it before unsecured creditors for approval. Copies of the agreed arrangement are registered at court.

The procedure to put a Company Voluntary Arrangements (CVAs) in place, and the implementation of a Company Voluntary Arrangements (CVAs) , must be supervised by a qualified accountant to act in insolvency matters – i.e. an insolvency practitioner.

A Company Voluntary Arrangements (CVAs) is not necessarily a “once and for all” solution. A creditor may consequently apply to a court on the grounds that there is significant non-regularity with the Company Voluntary Arrangements (CVAs) or that their interests are being prejudiced.

Until a Company Voluntary Arrangements (CVAs) takes effect, a company will be unable to prevent creditors from enforcing their rights until additional protection is sought from the court.

  • Voluntary winding-up

There are two types of voluntary winding-up but they both has to bring the life of a company to an end. A members’ voluntary winding-up confide on a declaration of solvency by directors. The directors swear that they have taken the full information into the company’s affairs and have concluded that it will be capable of paying all its debts, together with interest, within a year of the declaration. The company, at a general meeting, then passes a special decision to windup the company up and appoints an insolvency professional as liquidator.

A creditors’ voluntary winding-up is started by the shareholders, who pass a decision saying that the company cannot run by reason of its liabilities and can’t continue its business and that it is desirable to wind it up.The conduct of the winding-up generally revokes the shareholders’ wishes.

  • Compulsory winding-up

A compulsory winding-up can be started without the involvement of a company’s shareholders. A decision is done by the court, and at a hearing some weeks later the court will decide to make a winding-up order. If it does, the company is then in eradication. The petition is usually filed by beneficiary.

  • Receivership

A receiver may be appointed by the holder of floating charge granted by a company or a fixed. Typically, a company will be prepared with a demand for repayment of monies due, and this will be pursued by an appointment just hours later. Alternatively, charge holder to appoint a receiver by a company.

The receiver’s task is to recover sum due to the secured lender or to realize the lender’s preservation .

Reference:

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Shrestha, R. P. (2007). Business Law. Kathmandu: M.K.Books.

Akrani, G. (2011, 09 2). kalyan-city. Retrieved from http://kalyan-city.blogspot.com/: http://kalyan-city.blogspot.com/2011/02/what-is-cheque-definition-kinds-and.html

Bragg, S. (2011). accountingtools. Retrieved from www.accountingtools.com: http://www.accountingtools.com/questions-and-answers/what-is-a-bill-of-exchange.html

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The administration will have one of three purposes. These, in order of desirability, are as follows:

  • To rescue the company as a going concern – as against to selling its business and leaving a “shell”.
  • To achieve a better result for the creditors as a whole than if the company was wound up.
  • To sell the business or its assets in order to pay the secured and/or preferential creditors (e.g. employees owed wages/holiday pay and so on).

.Three methods of appointing an administrator 

 

  • Appointment  by the court
  • Appointment by the holder of a qualifying floating charge
  • Appointment by the company or its directors

 

Company Voluntary Arrangements (CVAs)

  • voluntary winding- up
  • Compulsory winding-up
  • Receivership
.

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