Liquidation, Administration and Company Voluntary Arrangement - Essay Example

? Liquidation, Administration and Company Voluntary Arrangement The paper sheds light on the liquidation, administration and company voluntary arrangement of companies under the relevant laws which are in effective in England and Wales. The paper discusses the nature of the three procedures and how each of them are effectively carried out by the companies with the effectiveness of Administration and Company Voluntary Arrangement in securing the rescue and wellbeing of companies which are having going concern issues and how these can prolong the life of companies and secure the investment of shareholders in difficult times. Liquidation Liquidation or more commonly known as the winding up is the main and frequent kind of bankruptcy procedure of corporate entities. It is the official winding up of the affairs of company affairs and involves the realization of its assets and the allocation of the profits after the payment of the liabilities of the company in an approved priority sequence as determined by the relevant laws of the state. 1 Liquidation can voluntary or even compulsory. It is said to be voluntary when it is initiated by the will of the company through a resolution of the equity holders. It is said to be compulsorily carried out when the order of the court becomes the cause of the winding up of the company. 2 In a nut shell, there are two basic kinds of Liquidation procedures whose nature is explained in detail below: Voultary Winding Up In this kind of liquidation the company goes on to willingly wind up the affairs of the company and distribute the assets of the company after paying off the liabilities of the company. There may or may not be a going concern issue of the company and the company may voluntarily windup due to certain reasons which are listed below: Expiry of tenure for which the company was formed Attainment of the purpose or adventure for the company was formed And the shareholders of the company have passed a resolution to that effect for the winding up of the company in both the cases. After the resolution of voluntarily winding up is passed by the shareholder of the company, the company can be wound up by two possible procedures which can be, either through: Members voluntarily winding up Creditors voluntarily winding up Creditors’ voluntary winding up is usually due to the company becoming insolvent and unable to pay off its liabilities in due course and the company is perused by the creditors in order to prevent further debts accruing and to receive the due liabilities through the realization of the assets of the company in a process of liquidation. 3 Compulsory Winding up This kind of winding up takes place when the company is ordered to be wound up by an order of the court. There are numerous potential ways of this procedure to institute however the most general one is through the petition filed by the creditors on the argument that the company is unable to pay off its liabilities in due course and since it has not been deemed likely to arrive at a voluntary agreement on liquidation, the compulsory winding up via the court is instituted. The nature of the compulsory winding up is such that the company comes under the process of liquidation under an order from the court on grounds of inability to pay the debts or where the company has certain going concern issues which cannot be resolved through a successful surgery of the company’s affairs or the provision of cash inflows or bailouts where the company may be able to restore the balance of its affair on the positive side.4 However, a request to obtain a leave to prosecute a company which is being compulsorily wound up may be made to the Court who gave the order of winding up of the company. Consequences of Winding up When a company goes into liquidation, mainly due to the compulsory winding up process there is usually a cause of inability to pay its debts whereby the company has to face certain consequences during and after the liquidation and the victims of those consequences are mainly shareholders, employees and even customers. 5 The lenders usually are able to obtain a fair share of their lending out of the liquidation proceeds as they have foremost charge on the asset. However, where the liquidation of due to extreme circumstances then even the creditors of the company don’t get a fair share of their amount lent to the company which causes a loss in the confidence of the lenders as well as the investors. In order to avoid the repercussions of the liquidation process and the loss that the stakeholders sustain due to the liquidation, the regulators introduced procedures to restore the balance of the books and to enhance the life of the companies facing going concern issues. The two main rescue procedures that tend to restore the balance are: Administration Company Voluntary Arrangement (CVA) The two are explained in detail below with the effectiveness of both the methods in achieving a genuine rescue culture for companies in England and Wales. Administration Where the compulsory liquidation goes ahead and becomes immediately an administration governed by the relevant authorities, the court may assign the job of administrator to the former to perform the job as a liquidator. An administrator may also become a liquidator consequently to act in a CVL. Definition Administration is a process where an administrator is selected for a period of up to a certain period although it can be increased by Court or with the consent of the creditors to administer and supervise the affairs of the company, business and assets for the advantage of the creditors. 6 An administrator may be selected to continue the administration of the company’s affairs either by an order of administration instituted by the court of law or the person who is entitled to a floating charge on the assets of the company; or the company or its board of directors. When an administration of a company begins, any winding-up petitions which are pending will be discharged or discontinued and there will be a suspension on bankruptcy and on other legal procedures of the company. Objectives of administration The main and foremost objectives of the administrations are to: Rescue a company from a scenario as a going concern issue; Obtain a enhanced value for the assets of the company or to recognize their worth more favorably for the creditors and lenders as a whole than would be achieved if the company was to wound up without being administered; or In certain cases, realize the worth of assets in order to make an allocation to one or more privileged creditors The administration of a company is able to enhance the value realized and to rescue the company as a going concern. This method improves the company’s position when in a liquidation process and enables the company to realize a much fair value of the assets and to secure a rescue. Effectiveness of Administration Administration aims at securing a proper rescue of the company under liquidation and aims to achieve it through securing a fair distribution. There are certain prerequisites for the administration process to be undertaken in order to reach a reasonableness rescue of the company. The company has to be of a realistic size It should have practically predictable cash inflows and outflows It must be capable of predicting profitability. There has to be a bankrupt situation or the company must be in a situation of being contingently on the verge of being wound up. The board of directors of the company believe that an aggressive creditor is capable of gravely affecting the prospective trading possibilities of going concern and may force a liquidation of the company The effectiveness of the administration process is apparent from the fact that the administrator continues the business of the company, and aims to put the company under liquidation back on track. If they are able to achieve this objective, they hand the control of the company back to the board of directors and the management in order to continue as before. However, If he is unable to save the business and to continue as a going concern, they at least aim to acquire a better return for the lenders and the creditors by selling the company’s assets so that the creditors are able to receive a fair share of their amount lent. During the time the company is in administration, none of the lenders or other stakeholders can commence the liquidation process or repossess property and other assets of the company. 7 There are quite a few ways through which an administration process may come to an end. The most frequent of them is that they move into winding up which is the creditors’ voluntary winding-up or progress to the liquidation if the administrator believes that a company under administration doesn’t have enough property assets with which a proper distribution can be made to the creditors of the company and the lenders. In order to establish the same the administrator requests an account of the affairs of the company from relevant people i.e. the directors, employees and other related personnel. Advantages of Administration There are certain advantages of the administration process which are stated below: It prevents the financial position of the company from worsening and the management being at more risk. It can be a very rapid and cost effective process All the debts which are unsecured are removed. From the perspective of the creditor's, since an approved insolvency administrator is chosen to administer the company, it makes sure that he gives regard to the position and situation of all creditors. Safeguard from the creditors to force liquidation and take away the assets allows the administrator a realistic time to achieve the objective of administration. Company Voluntary Arrangement Another form of rescue procedure in order to rescue a company is to do it with a Company Voluntary Arrangement. Definition A Company Voluntary Arrangement takes place when a company which is on road to a liquidation process agrees with the creditors through a proposal of ‘composition in fulfillment of its debts’ or a proposal of arrangement of company’s affairs’. It is an arrangement which is approved by the court through which the company has officially agreed on the conditions with the creditors and other lenders for satisfaction of its debts. It (‘CVA’) is fundamentally an agreement between a company and all of its creditors and lenders in which they agree on a conciliation settlement of the debts and liabilities of the company. In general, the creditors of the company accept a bargain payment against their debts due over a certain period of time in response for which the company is allowed to carry on business and thereby provide the creditor with ongoing business. 8 Frequently, another option for the creditors can be receipt of nil return after the liquidation, so the Company Voluntary Arrangement is a better alternative. The procedure is governed by a approved bankruptcy practitioner. A Company Voluntary Arrangement may be initiated be: The administrator, if an order has already been passed The liquidator, incase if the company in the process of liquidation The board of directors of the company, for situations other than the above Nature of the Company Voluntary Arrangement A Company Voluntary Arrangement has positive effects on the company and the company can: Directors are able to continue in command of the company It can aid in restricting the legal actions like liquidation petitions The creditors can gain a fair share of their liabilities A company voluntary arrangement permits the prospect for the business being sold or refinanced. Effects of a company voluntary arrangement There are numerous positive effects of a company voluntary arrangement which aids in the rescue culture of the companies situated in England and Wales and provides them an opportunity to sustain their business and provide an impetus to continue as a going concern. 9 Some of the positive effects of Company Voluntary Arrangement are mentioned below: Company voluntary arrangements can help develop the cash flows of the company in quick succession They tend to curb demands of taxes, Value Added Taxes etc during the CVA is being arranged A company voluntary arrangement can aid in quickly slashing costs Company voluntary arrangements can cease contracts employment, ongoing lease transaction, onerous contracts of supply and all with Zero costs The Board of directors and the shareholders of the company usually remain on top of things at the company It bears a much lower cost as compared to receivership or even administration where a separate person has to be appointed to conduct a thorough process It offers a fair deal for the creditors as they are able to keep hold of a client and accept a share on their outstanding debts The Company voluntary arrangements procedure has been a very crucial part of the United Kingdom law ever since 1986 and is considered as one of the most favored rescue choices of the Government. The company is sheltered by the Court during the directors of the company and the administrator composes a procedural arrangement for the company voluntary arrangement to take place. In case there is a danger of the creditors of the company forcing into a liquidation process of the company taking a hostile course of action then this is an effective and dominant means to control them. It is widely believed that administration is at times needless in the majority of the situations. Approaching a company voluntary arrangement is a good and effective way to a reduce costs and curb the publicity of the dilemma of the company via revival. Conclusion In the modern days of corporate culture bankruptcy and liquidation has become more common especially after the era of 2008 recession where numerous companies lost their corporate existence and were forced into liquidation after several bailout attempts. The objective of administration and Corporate Voluntary Arrangement is to make use of means in order to extend the life of companies and to strengthen their existence over a longer period of time and the two have been able to achieve it to a great extent where the companies who have reached going concern issues are able to reach out agreements in order to safeguard their existence and to prolong their corporate wellbeing. On the other hand, this has also been able to enhance the confidence of the creditors whereby they were reluctant to extend credits to the companies on fear of repayment and bankruptcy. Bibliography ICEAW, 2010. Creditors guide to liquidators fees. England and Wales Insolvency: Enforcement guide, 2010. HSE Liquidation Enforcement, 2012. http://www.hse.gov.uk/enforce/enforcementguide/investigation/identifying-insolvency.htm#Liquidation Viewed April 17, 2013 Administration, 2012. http://www.hse.gov.uk/enforce/enforcementguide/investigation/identifying-insolvency.htm#Administration Viewed April 16 2013 Insolvency guide, 2013. Liquidation and Insolvency, Department for Business Innovation and Skills. The Law Donut, 2013. http://www.lawdonut.co.uk/law/finance-and-strategy/dealing-with-insolvency/insolvency-20-faqs Viewed April 15, 2013 Detailed Administration, 2013. http://www.companyrescue.co.uk/company-rescue/guides/detailed-administration Viewed April 17, 2013 Wildly and Sons, 1991. Copulsory Winding up Procedures, 3rd Edition. Sweet & Maxwell Ltd. Winding-Up Consequences, 2013. http://windinguppetitionsolicitors.co.uk/winding-up-consequences/ Viewed April 18, 2013 Read More