Frequently Asked Questions
Can I protect my house?
An IVA prevents creditors from taking action against you and your property. However, before the end of the IVA, it may be necessary for you to introduce a sum of money into the arrangement in place of a proportion of your share of equity in your property. This is normally done by raising money on your property either as a remortgage or a secured loan. The refinancing needs to be affordable and there are terms that restrict any increase in your mortgage or secured loan payments to not more than 50% of your contribution. If refinancing is not possible, you are generally able to extend the arrangement for a further twelve months during which you time you pay additional contributions in place of equity. If you have serious levels of tax, HMR & C are likely to require equity is introduced in year 1 or 2.
Can I exclude my business assets from an IVA?
You can exclude your business assets from an IVA particularly if you can prove the assets are needed to enable you to carry on trading. For example work car, book debts, plant and equipment and office furniture. Your proposals will need to detail your assets and provide updated values. Creditors could require you to sell a non-essential asset to improve the outcome for creditors.
How do the IVA fees get paid?
As soon as you decide to proceed with an IVA then your payments to creditors cease and contributions towards your IVA start. These will be set at a figure which you have agreed you can afford. It takes around 6 – 8 weeks to set up an IVA and the contributions made prior to approval of the IVA, will be treated as a deposit towards our Nominees fees. Once your arrangement is approved you will only pay the monthly contributions agreed by your creditors.
The Nominee’s fee will vary depending on the complexity of the IVA but typically are between £2,000 and £3,500 for IVAs for self-employed traders. The Supervisory fees are normally capped by creditors at between 15 and 20% of realisations. The Supervisory fees are drawn monthly from the monthly contributions. All fees will be discussed in detail with you prior to any plan being put in place. (If creditors reject the IVA proposals we do not seek to recover the balance of the Nominee’s fee from you).
Do I need to make payments to my creditors during the setup stage?
Your balances are likely to increase during the setup stages of your IVA; however, they will be included in the arrangement. Relevant rules issued by the Financial Conduct Authority recommend that you immediately notify your creditors that you are proposing to enter in to an IVA and are following our advice to stop payments direct to them. We will immediately write to all of your creditors to let them know of your decision. You may if you wish, maintain contractual/token payments to creditors during this drafting stage of your IVA; however this is not a requirement as your creditors will be notified of our involvement as soon as we receive your consent pack which often takes the pressure away from you.
Do I need to open a new bank account?
Yes, if you have debts with the same bank. Creditors have the right of set-off, which means they can take your wages to “set-off” against other monies owed to them. If you are not overdrawn and do not have loans or credit cards with your bank then you do not need to open a new bank account.
Please open a bank account with no overdraft facility. Creditors will generally insist that you do not incur future credit which includes allowing your bank account to be overdrawn. For help with opening a bank account see bank accounts.
Is my IVA likely to be approved?
Yes, we would not recommend an IVA as a solution if we did not believe it had more than a reasonable chance of being approved. It would be unfair to you and a waste of everybody’s time and energy. It is rare for any of the IVAs that we assist with to be rejected as creditors are generally willing to negotiate. If you have high levels of self-assessment tax and VAT outstanding, HMR & C have set out criteria for acceptance of an IVA which we will discuss with you.
We will discuss with you other solutions you may consider if your IVA proposals are not approved. This could include a debt management plan coupled with a Time to Pay plan with HMRC.
How does this affect my credit rating?
An IVA will be on your credit record for six years which is the same length of time as any other adverse credit is recorded.
Will I still be able to obtain credit?
The IVA proposal normally states that you can only get credit if your Supervisor allows you to do so. This does not normally apply to individuals in business who can demonstrate that they need credit to be able to continue trading.
Will an IVA effect my ability to trade?
It may be difficult to obtain supplies on credit during an IVA. This may be due to your credit rating and/or because you owe your suppliers money. This could effect your ability to continue to trade. These matters are assessed when considering the viability of your proposals.
Can an IVA prevent or stop action by my creditors?
Frequently when creditors are notified of your intention to propose an IVA, they will agree to postpone any action until the meeting of creditors to consider your proposals. If creditors persist with legal action, your Nominee can apply on your behalf for an interim order which if granted will prevent action from continuing or commencing. Once your IVA is approved, creditors who are covered by the IVA are prevented from taking action against you.
Will my creditors stop contacting me?
Yes, once your IVA is approved all further contact from creditors should cease. It may take a while for creditors to amend their systems but within 1 to 2 months of the IVA starting, all communication from your creditors will stop. Creditors are legally bound into the terms of an IVA, consequently preventing them from pursuing you for the debt.
Can my arrangement be brought to an early conclusion?
Yes, we can convene a variation meeting to offer a sum of money in full and final settlement of your obligations under the IVA. The sum of money could be raised by:
1. Remortgaging your property
2. Funds from a relative
3. Cash in policies (Subject to getting you expert investment advice)
Creditors are likely to agree to accept a lump sum to bring the arrangement to an early end if you can show that you are paying creditors as much as you can afford.
What happens if I can’t pay my contributions?
If you find you cannot maintain your payments, your IVA terms will normally allow your Supervisor to agree to reduce your contributions or allow a payment break. It is important that you keep in touch with your Supervisor if you struggle to meet your contributions. We understand that most of us encounter unforeseen problems and we need to know so that we can help.
Who gets to know about my IVA?
Unlike bankruptcy your IVA is not advertised in a newspaper. Your employer will not know unless you choose to tell them. Your IVA is registered on the Insolvency Services register which is picked up by credit reference agencies and as such will be noted on your credit record.
What are downsides of an IVA?
The payment period for an IVA is normally 5 years unless creditors agree an early settlement. In Bankruptcy Income contributions are for a period of three years only. The extra 2 years of contributions with an IVA mean that creditors get a better payout which is why they support IVA’s.
You have to make sure that you can afford to meet your contributions. If you fail to pay your contributions, and there is no reasonable explanation for the failure, your arrangement may fail. Creditors will no longer be bound by the arrangement and can pursue you for the full amount of their debt. Failure of the arrangement could also mean that the Supervisor has to petition for your bankruptcy. If you cannot meet your payments through hardship, we will always strive to vary or settle the arrangement, rather than fail it.
All debt solutions should be very carefully considered. Fees will be charged if a solution is taken in order for us to set up your plan and maintain it – all fees will be outlined during your consultation. For further information on fees, please see the FAQ section of the different solutions available. Retained payment may place you further into arrears. You have the right to a cooling off period of 14 days. It is likely that your ability to obtain further credit in the short term will be affected and this may also be the case over the medium to long term. Calls to our free phone number from mobile phones and other networks may be charged.
The Insolvency Service website has helpful information at https://www.gov.uk/options-for-paying-off-your-debts/overview to support those who find themselves in financial difficulty.
What is a Partnership?
A partnership is defined as the relationship which subsists between persons carrying on a business in common with a view of profit. Unlike a business which has been incorporated, a partnership is not a separate legal entity, and therefore all partners’ share responsibility for the business, and its liabilities.
Partners, can be either individuals or corporate entities, but each partner is personally liable, usually without limit, for the unpaid debts of the partnership.
How does a Limited Liability Partnership (LLP) differ?
An LLP is dealt with under the Limited Liability Partnership Regulations 2001. These are hybrid entities with characteristics falling between those of a limited company, and those of a partnership. Like a company, an LLP is considered to be a corporate body and therefore a separate legal entity. Generally this means that partners’ of an LLP will not be liable for the unpaid debts of the partnership. For options for LLP’s, see here.
Who can make a PVA proposal?
A PVA proposal can be made by:-
- The Members of the partnership
- The Trustee of a partnership
- The Administrator, where a Partnership Administration Order is in effect
- The Liquidator, where the partnership is wound up as an unregistered company.
The proposal can take any form, subject to agreement. However, a PVA will commonly involve the partnership making reduced payments, capital restructuring, or an orderly disposal of assets within an agreed timescale. Although the partnership will remain under the day to day control of its directors’, the PVA trust will be controlled by the Supervisor of the arrangement.
How will I know if a Partnership is insolvent?
The tests for an insolvent partnership are similar to those which apply to a limited company or LLP. If a partnership is:
- unable to pay its debts as they fall due; or
- its liabilities exceed its assets;
the partnership is insolvent within the meaning of the UK statute. A partnership will not be insolvent solely on the basis of one of its members being individually insolvent, if it is itself able to pay its debts as they fall due, or its assets are greater than its liabilities.
As a member of the partnership, what debts will I be liable for?
In general, every member of a partnership will be jointly liable for all debts and obligations of the firm, which were incurred while he, or she, is a partner, so far as they remain unpaid. Subject to any other agreement between the partners:-
A person who is admitted as a partner into an existing firm does not become liable to the creditors’ of the firm for any liability incurred before he, or she, became a partner.
A partner who retires from a firm does not cease to be liable for partnership debts or other obligations which were incurred before his or her retirement.
What happens if the partnership does not comply with the terms of a PVA?
The terms of the PVA will determine what will happen in the event that the partnership does not comply with the terms of the approved proposal, or otherwise falls into default. Most likely, the terms of the PVA will provide that, should the partnership default, the Supervisor will issue a default notice which sets out what needs to happen to rectify the default. If this is not rectified, the Supervisor may petition for the winding up of the partnership as an unregistered company.
What are the alternative options to a PVA?
PVA’s require the commitment of all members’ of the partnership if they are to be successful. This is because the partnership will have to make agreed contributions to its existing debt, and also keep up to date with current liabilities as and when they fall due. For this reason, it can be more appropriate to consider the other options available to an insolvent partnership.
Partnership Administration Order
A Partnership Administration Order is very similar to the procedure used to place limited companies into Administration. The procedure operates in much the same way, and in certain circumstances, it allows an Administrator to be appointed to the partnership without a court order.
The effect of a Partnership Administration Order is similar to that of corporate Administration, as is the effect of a moratorium on proceedings. However, it should be noted that a moratorium in relation to a Partnership Administration Order will not prevent a creditor from bringing proceedings against a partner in respect of a partnership debt for which that partner is liable. For further information on a Partnership Administration Order, see here.
Partnership Liquidation with (or without) concurrent Bankruptcy petitions against Members’
As noted above, members’ of the partnership are personally liable for the debts of a partnership. This means that the partnership can be wound up as an unregistered company, with Bankruptcy petitions presented against one, or more, of the individual members’.
A creditor of a partnership can petition for either:-
- the winding up of an insolvent partnership as an unregistered company, with bankruptcy petitions also presented against one or more of the members’; or
- the winding up of the insolvent partnership as an unregistered company, with no action taken against any of the individual members’.
Alternatively, a creditor may choose to take no action against the partnership itself, and rather pursue one (or more) of the individual partners for the payment of the partnership liability. If the partnership liability remains unpaid, the creditor can present a bankruptcy petition against the relevant partners’.
A member of an insolvent partnership may also petition for the partnership to be wound up with, or without, concurrent petitions against the other members’. However, there are various conditions to be satisfied and for further information please contact us for advice.
Who can make a CVA proposal?
A CVA proposal can be made by:-
- The directors;
- The administrator, where the company is in administration;
- The liquidator, where the company is in liquidation.
The proposal can take any form, subject to agreement. A CVA will usually involve the company making reduced payments, capital restructuring, or an orderly disposal of assets within an agreed timescale.
Although the will company remain under the day-to-day control of its directors’, the CVA trust will be controlled by the Supervisor of the arrangement.
Why a CVA and not Liquidation?
Insolvent liquidation (winding-up) is a process for companies’ that have ceased trading, or are likely to cease trading as a result of their financial position, and have insufficient means of paying their debts in full.
Winding up a company can have a greater impact on the directors’ of that company. For example, if the company has insufficient assets to repay its liabilities in full, any personal guarantees which might have been given will be called upon, and the directors’ conduct will be subject to review. Company Voluntary Agreements are generally cheaper to implement, and should offer a better return to creditors’.
Can a CVA provide protection from legal action?
Yes. If the company is under significant pressure, then steps can be taken to obtain legal protection against any other proceedings. This protection is known as a ‘moratorium’ and is obtained by filing certain documents at Court. The moratorium will automatically commence on the filing of these documents and initially last for a period of 28 days.
The 28 day period can be extended for up to 2 months but the existence of the moratorium must be advertised. The moratorium prevents action by a landlord, and by any secured creditor against the company’s property and assets. It also prevents any other legal process (such as a winding up petition) from commencing or continuing. In order to be eligible for a moratorium the company must meet 2 out of the following criteria:-
- Turnover must not exceed £10.2 million per annum;
- The balance sheet assets must not exceed £5.1 million;
- Have no more than 50 employees
What is the effect of a CVA on creditors?
Once approved the terms of the CVA are binding on all creditors who would have been entitled to vote at the meeting of creditors, irrespective of whether that creditor voted or not. It will also bind any creditor who (by honest omission) did not receive notice of the meeting.
What is the attitude of HM Revenue & Customs in relation to a CVA?
Debts due to HM Revenue and Customs (“HMR&C”) rank equally with ordinary unsecured creditors’ of the company.
In order to provide a consistent approach to their decision on whether or not to accept VA proposals, HMR&C have a specific Voluntary Arrangement Service, known as VAS. All VA proposals must be submitted to VAS rather than the local tax office, and VAS apply a strict range of criteria for examining proposals and further information can be found here.
HMRC will often require a Supervisor to issue a winding-up petition if the terms of the CVA are breached, or it post-CVA tax liabilities are not paid as and when they fall due. The Supervisor will be required to retain sufficient funds to allow for such a petition to be presented.
Can a creditor challenge a CVA once it has been approved?
Yes. Any creditor who was entitled to receive notice of the CVA proposal is entitled to make an application to court if the approved arrangement treats them unfairly, or if there has been some material irregularity in the conduct of the procedure used for consideration of the proposal. For this reason, it is important that proposals are as accurate as possible and there has been full disclosure as to the company’s financial position.
What happens if the company does not comply with the terms of the CVA?
The terms of the CVA will determine what will happen in the event that the company does not comply with the terms of the approved proposal, or otherwise falls into default.
Most likely, the terms of the CVA will provide that, should the company default, the Supervisor will issue a default notice which sets out what needs to happen to rectify the default. If this is not rectified, the Supervisor may petition for the company’s compulsory liquidation if the directors fail to take action to wind up the company voluntarily.
This means the creditors’ of the company cease to be bound by the CVA, allowing them to pursue the company for the balance outstanding, after the Supervisor has distributed any assets held partial satisfaction of the company’s debts.
Will I be taking out a new loan to clear my other debts?
No. A Debt Management Plan is a way of helping you make affordable payments to your existing creditors. The Debt Advisor Ltd cannot provide you with a loan.
How does it work?
Firstly we accurately assess your circumstances and make a provision for priority debts. If we establish that you cannot afford to meet minimum contractual payments, we will advise you on all appropriate options. If the debt management plan is the most suitable solution we will negotiate and agree a payment plan with your creditors. You will make one monthly affordable payment which we will distribute to creditors on your behalf on a “pro-rata” basis.
Who will look after my account?
We have a dedicated team of debt advisors who will be there to aid and assist you through your debt management plan.
Will you be dealing with every company I owe money to?
There are debts which are regarded as “priority” debts which include your mortgage, rent, utilities and council tax. You will continue to pay these each month and if there are arrears to priority creditors, we will make sure that your plan includes payments to clear the arrears. You can then increase your payment into your DM plan when your arrears are cleared.
Will my creditors/lenders definitely accept your proposed plan?
Creditors and lenders do not have to accept our proposals. In our experience, the majority of our debt management plans are accepted by creditors and they do not resort to action. All you need to remember is to let us know immediately of any threatening calls or letters, or any legal documentation so we can guide you and help you take action appropriately. If it becomes apparent that creditors are looking to take action, it may be appropriate to consider a formal debt solution such as an IVA or bankruptcy.
Will I have to pay for longer due to the reduced payments involved?
This is possible; however, the payments will be affordable every month. The creditors are not obliged to accept your offer of repayment through this plan or freeze interest and charges, and if they do not, it may take longer and cost more for you to repay the creditors in full due to the possibility of additional fees and charges.
What happens if I fail to make a payment?
It is highly likely that your creditors would withdraw their support of the plan and may commence legal proceedings.
How will I keep up to date with progress?
We will send you a statement every six months showing what money has been received from you and how this has been distributed. You should also continue to receive statements directly from your creditors.
We also have an online portal available that delivers numerous benefits such as:
- Access 24 hours a day
- Online communication with your personal advisor
- View payments / repayments
- Make payments online
- Download / upload area
We will provide you with login details once your documentation has returned and your arrangement is activated.
Can I, and should I, deal with my creditors myself whilst in the plan?
You can if you wish; however, there are a few factors to consider. Dealing with your creditors can be a time consuming and stressful process, which requires you to maintain regular contact with them, therefore the service that we provide takes this pressure away from you. We are here to ensure your solution is appropriate for you and managed effectively, up until your debts have been cleared or an alternative solution becomes more appropriate for you.
What do I pay the fees for?
You are paying for a professional service and employing our skill and expertise. The set up fee you pay covers the work we undertake to set up your plan, which includes drafting your debt management plan, sending this out to creditors, liaising with creditors to gain their acceptance to the plan and dealing with creditor’s queries. The management fee covers the following: conducting 6 monthly reviews, a dedicated team of advisors to help you with any queries, handling any letters or emails you may receive, ongoing negotiations with your creditors to ensure your plan runs smoothly, handling letters, e-mails and phone calls from your creditors, distributing your monthly payment to your creditors, assistance with legal action that may be taken by your creditors, and our Customer Portal available to you 24/7.
Will I be charged if I change my mind?
There is a 14 day “cooling off” period from the date you accept The Agreement Terms. If you decide to not continue with the plan within the first 14 days, we will refund your payment, unless a distribution has already been made to your creditors.
When will my plan be reviewed?
We review your plan every 6 months and take into account any changes in your circumstances. If your situation changes in any way, we would ask you to contact us immediately. If your situation has worsened we will write to your creditors to negotiate a new affordable repayment plan, or discuss an alternative solution with you.
How long will my plan last?
Each plan is individual to each customer’s financial circumstances. Due to the fact you are paying less than the original contracted payment to each creditor, the term to repay the debt will be longer but the repayments are more affordable.
What happens if the debt management plan is not working, creditors take action, and my debts increase?
We review your plan on a 6 monthly basis and report to you on the progress of your plan. If at the review stage or at any time in between reviews, we find that creditors are threatening action and your assets are at risk or your debts are increasing, we will let you know and make appropriate recommendations which could include withdrawal from the plan.
What happens if I have any CCJs and you have to go to court to reduce the monthly installments?
You may have to pay £50 to apply for a variation order. This is a charge levied by the court none of which is retained by The Debt Advisor Ltd.
Will my employer find out?
If you are already in employment, your employer may decide to perform a credit check. This could reveal that you currently have an arrangement with your creditors; generally, it is unlikely to affect your employment.
If you are seeking new employment, there are some organisations that perform a credit check as part of the recruitment process to establish whether or not you are having financial difficulties. This check will not necessarily affect your chances of employment.
Employers must obtain your permission to perform a credit check.
All debt solutions should be very carefully considered. Fees will be charged if a solution is taken in order for us to set up your plan and maintain it – all fees will be outlined during your consultation. For further information on fees, please see the FAQ section of the different solutions available. Retained payment may place you further into arrears. You have the right to a cooling-off period of 14 days. It is likely that your ability to obtain further credit in the short term will be affected and this may also be the case over the medium to long term. Calls to our free phone number from mobile phones and other networks may be charged.
The Insolvency Service website has helpful information on https://www.gov.uk/options-for-paying-off-your-debts/overview to support those who find themselves in financial difficulty during the recession.
How long will I be bankrupt for?
You will receive an automatic discharge within 12 months from the date you are declared bankrupt. That is unless your discharge is suspended because you have not cooperated with the person administering the bankruptcy – the Trustee.
However, if you are felt to have accrued the debt culpably, recklessly or dishonestly then you may be subject to a Bankruptcy Restriction Order (BRO) for between 2-15 years.
What are the restrictions imposed on me whilst bankrupt?
During the time in which you are bankrupt and in which any BRO’s apply, you are prohibited from being a director of a company. Also, if you are self employed, then you cannot trade in any other name apart from your own and you cannot apply for credit for more than £500 without declaring your bankrupt status.
There may also be some restrictions imposed on your profession, especially if your job involves working with money or holding a professional licence.
How do I make myself Bankrupt?
As from April 2016 you no longer need to attend court if you are petitioning for your own Bankruptcy. If you need advice on Bankruptcy please do request a call back. Bankruptcy needs careful consideration. If it is appropriate to petition for your Bankruptcy, you can do this yourself, https://www.gov.uk/apply-for-bankruptcy or get in touch with National Debtline 0808 808 4000 or by visiting their website.
Will I have to pay anything back?
If you are deemed to have a surplus income, after providing for the reasonable cost of living, then you will be asked to make a contribution towards the bankruptcy for a period of three years.
Contrary to what many people think, you are allowed enough money to pay for your reasonable living costs. By completing our debt calculator you will be able to calculate your surplus after providing for living costs.
Can I be forced to sell my home or any of my belongings?
Personal possessions of a reasonable nature are excluded from bankruptcy; these include your household possessions and tools of the trade which usually includes your car if you can demonstrate that you need the car to get to work. The Trustee is entitled to ask you to downgrade an item if they feel it is extravagant and introduce funds raised into your bankruptcy. For example if you have a car on hire purchase, which is judged to be too expensive and consequently affects the amount your creditors would receive, then you will be asked to trade it in for a cheaper vehicle.
Assets which have value including your equity in any property, in excess of £1,000, will have to be realised to pay creditors. The money is generally raised either through remortgaging the property or if that is not possible, by selling the property. If the amount you need to raise is relatively small, it is always worth considering if family can help you raise the necessary sums to prevent the sale of the property.
Will I be able to continue to trade?
Bankruptcy can make continued trading difficult. If you have stock, equipment and assets, these vest in your Trustee and he/she will want to realise these assets. As mentioned above essential tools of trade are excluded from Bankruptcy but these generally include essential tools and not for example all the equipment used in a motor repair business. Also you could find your business insurance policies and finance agreements cancelled.
Is anybody going to come to my home?
It is unlikely that anybody will come to your home unless you have business assets at home which may have value. The Trustee does have the power to investigate whether you have any other assets which you have not disclosed in your statement of affairs.
Is my Bankruptcy advertised?
Bankruptcy is public and advertised in the London Gazette. Bankruptcy and BRO’s are also recorded onto a register freely available to the public via the internet. Your Trustee has the discretion to decide if your bankruptcy should be advertised in a local paper. This would be because you have creditors that may not know about your bankrupt. As such there is the possibility that others may be alerted to your bankruptcy. Any suppliers you owe money to will be notified of your Bankruptcy.
Is it possible to include ALL debts in bankruptcy?
Bankruptcy is binding on all creditors including credit card debt, utilities charges , council tax, Revenue debts including overpaid benefits, VAT, Self Assessment Tax or PAYE/NIC plus shortfalls on the sale of property. Matrimonial, criminal and student debt do, however, survive bankruptcy and remain your responsibility after discharge.
How will bankruptcy affect my credit rating?
Bankruptcy will remain on your credit records for a period of 6 years. Once you receive your discharge it will be recorded on your credit profile; this may not be done automatically therefore it is beneficial to ensure your credit file is always kept up to date. During the time you are bankrupt you are prohibited from obtaining credit for more than £500 without declaring your bankrupt status.
With bankruptcy on your credit record, it is likely to affect your ability to obtain credit, bank accounts with a cheque card and possibly even certain types of employment.
Once it is off your record then you can start to rebuild your credit, for example by obtaining a small overdraft facility and making sure you do not exceed your limit. If you established a reliable record with your bank, and you do need additional finance, the bank may be prepared to consider a loan.
Once you have begun to rebuild your credit you should be able to apply for prime rates again and then transfer balances from the sub-prime lenders you have been using.
Will I be allowed a bank account?
A change of law in December 2015 has now made it easier to open a basic bank account. Nine major banks and building societies launched new fee-free basic bank accounts for 2016, bringing an end to high charges and limited access to cash machines for those excluded from the mainstream banking system.
Barclays, The Co-operative Bank, HSBC, Lloyds Banking Group, Nationwide Building Society, NatWest, RBS, Santander and TSB all launched new deals. See www.which.co.uk/money/bank-accounts/reviews-ns/bank-accounts/best-basic-bank-accounts/
What happens if a creditor threatens to issue a petition to wind up a company?
This is a serious matter. Once a petition has been filed at court and served at the company’s registered office, the petition is advertised in the London Gazette.
The banks and lenders review the London Gazette and will freeze the company’s bank account once the petition is advertised. This means that ongoing trading is impossible.
Any dealings with company’s assets between the date of the petition and date of a winding up order are void unless sanctioned by the court.
Do not ignore a creditor who threatens to wind up a company. Make arrangements to pay the debt or if the debt is disputed explain why. If these two options are not available seek advice as to your company’s position.
What happens if a petition is served, but I pay the petition debt?
Once the petition is served you must either make arrangements to pay the debt or defend the action. Even if the debt is paid, the winding up hearing will proceed.
At the hearing, the court can dismiss the petition, make a winding up order, adjourn proceedings or make any other order as it thinks fit.
The danger is that another of your creditors will find out about the petition and join in the action. This effectively means that you need to pay or defend the claim or claims of any other creditors who have joined in the action, to avoid a winding up order being made.
A winding up order has been made, I am a director of the company, who will contact me?
Once an order has been made, the Official Receiver will contact you and request that you attend the offices of the Insolvency Service for an interview.
If the Official Receiver thinks that it is appropriate for an Insolvency Practitioner to be appointed as Liquidator, or if creditors request a meeting of creditors be called for the purpose of appointing a Liquidator, an Insolvency Practitioner being the Liquidator of the company will contact you.
What is the role of the Official Receiver or appointed Insolvency Practitioner do?
The Official Receiver’s or appointed Insolvency Practitioner’s role is to collect and realise the assets of the company and pay creditors, funds permitting.
The Official Receiver will also investigate the affairs of the company and the reasons for the company’s failure. This includes the submission of a report on the conduct of the Directors to the Secretary of State under the Company Director’s Disqualification Act 1986. The Secretary of State will use the report to decide whether to commence disqualification action. For further information read, ‘Directors’ Responsibilities – Disqualification.
What should I do as a director of the company?
You are under an obligation to co-operate with the Official Receiver and any appointed Insolvency Practitioner.
Get organised at the beginning. You need to look after and hand over company assets, make sure you have all the title documents, provide a list of the names, addresses and amounts outstanding to creditors. If possible complete or provide figures for the final VAT and PAYE returns.
You also need to look after the company’s books and records, list and hand them over to the Official Receiver. The Official Receiver will expect to receive bank statements, cheque and paying in books, correspondence with creditors, asset valuations, insurance policies, and a backup file of any records maintained on computer.
Be prepared for the Official Receiver’s investigation. Read Directors’ Responsibilities – Disqualification. If you consider that an action may be commenced against you, seek advice.
What does it mean to be ‘insolvent’?
The Insolvency Act 1986 provides that a company is ‘insolvent’ where a creditor(s) is owed in excess of £750 or more, and has served a statutory demand or obtained a judgement which is not satisfied, or it is demonstrated to the satisfaction of the court that the company cannot pay its debts as they fall due, or the company’s total liabilities exceed its assets.
What is the difference between Voluntary Liquidation and Compulsory Liquidation?
The main difference between CVL and compulsory winding up is that CVL is voluntary, initiated by the company directors. Compulsory liquidation is a procedure that is not entered into on a voluntary basis and is usually commenced by a disgruntled creditor, who has presented a winding-up petition to the court.
In the case of compulsory liquidation a date will be allocated for hearing the winding up petition, and details of the petition will be advertised in the London Gazette. At the subsequent hearing, the court is likely to make a winding up order against the company, unless there is adequate reason for it not to make the order. In any case, the court will have the power to make any order it sees fit in respect of a winding up petition which is presented against a limited company.
Who appoints a Liquidator?
The shareholders’ of the company must pass a resolution to wind up the company, and a resolution to appoint a Liquidator.
The creditors’ will subsequently confirm this nomination, or appoint their own choice of Liquidator. In practice, creditors’ will usually support the shareholders’ nomination, unless there is a specific reason for them to object to that appointment.
Until such time that the creditors’ decision is made, the liquidator nominated by the members has limited powers, although additional powers may be exercised with sanction of the court.
Will I need to attend a creditors’ meeting?
No – there is no automatic obligation for a director to attend a creditors’ meeting.
The Insolvency Rules 2016 (effective 6 April 2017) made significant changes to the CVL process. The requirement for an initial creditors’ meeting has been abolished, and is replaced by qualifying decision procedures, required where a decision is sought from the company’s creditors’ or shareholders’.
In order for the company to be placed into liquidation, the directors’ of the company must now deliver notice to the company’s creditors’ seeking their decision on the nomination of a liquidator by –
- Deemed Consent
- Virtual Meeting
However, a requisite majority of creditors’ can object to this decision being reached by either deemed consent or virtual meeting, and which will result in a physical meeting being convened. In order for a physical meeting to be convened, objections must be received from creditors’ by 10% in number, 10% in value, or 10 different creditors’.
What happens after a Liquidator is appointed?
Once a Liquidator is formally appointed to the company, the Liquidator will have various duties, and statutory obligations, to comply with. These duties include, but are not limited to, the following;
- Notification of the liquidation to Companies House, Creditors, Shareholders etc
- Ensuring that the company’s assets are safeguarded and realised
- Liaising with creditors regarding the progress of the liquidation and dividend prospects
- Liaising with employees regarding the progress of their claims\
- Submission of a report to the Directors’ Conduct Reporting Service
- Submission of statutory forms, progress reports and returns to HMRC
- Where there are available funds, agreement of claims and distributions to creditors’
What are the directors’ duties once the company is in CVL?
As stated, directors’ of the company have a duty to co-operate with the Liquidator and provide information concerning the company’s assets, liabilities, and its affairs in general. This duty to provide information to the Liquidator will also extend to any person who was employed by the company, or is otherwise capable of giving information concerning the insolvent company and its dealings.
At the start of the CVL process, the Liquidator will send each director of the company a questionnaire which forms part of their initial enquiries into the reasons for the company’s failure, and the conduct of directors’. Directors’ will be asked to complete and return this questionnaire within 21 days, and it should be noted that failure to return the completed questionnaire is a matter for consideration when submitting a conduct report.
In addition, the Liquidator will need to take possession of the company’s books and records, and will require that this information is made available for collection. We would ask that directors’ catalogue the company’s paper records, and provide a back-up of electronic records.
What if I have an overdrawn Directors Loan Account?
An overdrawn director’s loan account arises when a director has withdrawn money from a company which cannot be classified as a dividend or salary, and the amount withdrawn exceeds any amount injected into the company. At this point, the director is deemed to have an overdrawn loan account and whilst this is unpaid, it is considered to be an asset of the company.
It is important to note that it is not illegal to have an overdrawn loan account, as long as the advances made comply with the Companies Act 2006 and specifically the requirement that a director should not benefit from a loan of more than £10,000 from a company, without first obtaining approval from all of the company’s shareholders’.
If you are concerned about an overdrawn loan account in relation to an insolvent company, it is crucial to obtain comprehensive advice in relation to your personal financial position. Our team can provide you with appropriate advice and if this is applicable to you, please do not hesitate to contact us.
When does a CVL conclude?
Depending on the complexity of the individual case, a CVL can be concluded within 6 to 12 months of its commencement. Before the liquidation is closed, the Liquidator will give notice of their intention to conclude the liquidation to HMRC, and any other relevant departments.
Once there are no matters remaining to be resolved, the Liquidator will prepare a draft final account and deliver this proposed final account to all creditors’ and shareholders’ with a notice of a specified date (falling at least 8 weeks’ ahead) on which the liquidators intend to deliver the final account to them, and to the Registrar of Companies.
The liquidator vacates office when the final account is filed with the Registrar and the company itself will usually be dissolved automatically three months after the date of filing.
What is the difference between an MVL and Strike-Off?
When considering the most efficient way in which a solvent company can be wound-up, there are few feasible options. In previous years it was possible to use HMRC extra statutory concession (ESC16) to obtain approval from the Revenue to treat the distribution from the company as a capital distribution, and then strike off the company.
However, this option has not been available since 2012 and now distributions in excess of £25,000 are automatically treated as income, unless funds are paid to the shareholder out of a MVL.
Funds distributed out of MVL are treated as capital receipts and subject to Entrepreneurs’ Relief which can be claimed on capital gains on qualifying shares. Generally, individual shareholders’ prefer that distributions received by them are treated as capital receipts in order to benefit from more favourable tax treatment.
Notwithstanding the benefits of an MVL, the strike-off procedure could still be the best alternative in certain circumstances. It is only appropriate in relation to a company that is redundant for all practical purposes, and cannot be used if a company has any assets, or liabilities, or has been active within the previous three months.
An application is made by submitting a simple form to Companies House (Form DS01), together with a fee of £10. A copy of the application must be sent to the Registrar of Companies and various other parties. Once the application is received, the Registrar will publish notice of the application to strike-off and, if no objection is received within 3 months of publication, the company will be struck off the register, and subsequently dissolved.
What are the tax benefits of the MVL process?
The MVL procedure will usually allow a shareholder to extract their investment from a company in a co-ordinated and tax-efficient way.
A distribution in respect of share capital in an MVL is a capital distribution, and therefore not treated as an income distribution for tax purposes. Instead, the amount received by the shareholder is treated as the consideration for disposal of shares and is subject to Capital Gains Tax.
Where eligibility criteria are satisfied, Entrepreneur’s Relief allows a Shareholder to pay tax at 10% on qualifying assets. However, there have been changes to the tax treatment of dividends from limited companies which prevent financial benefit being obtained where the main purpose of a transaction is to obtain a tax advantage.
Under the current rules, capital distributions in an MVL will be treated as income under the following circumstances:-
- Where an individual, who is a shareholder in a closed company, receives from that company a distribution in respect of shares from a winding-up; and
- within a period of two years after the winding-up, the shareholder continues to be involved in a similar trade or activity (directly or via an associate); and
- the arrangement(s) have a main purpose, or one of the main purposes, of obtaining a tax advantage.
If the recipient of a capital distribution should fall foul of these conditions, that distribution could be classified as income, and therefore subject to the income tax regime – it is always advisable to obtain specialist tax advice.
What should be done before the Liquidation commences?
Before starting the liquidation process, the board must satisfy itself that the company is solvent, and that MVL is the most appropriate exit strategy. Directors’ should also ensure the following matters are dealt with:-
- Prepare final Accounts up to cessation of trade
- Realise (sell) company assets
- Collect any monies owed to the business
- Pay all company liabilities
- De-register for VAT
- De-register as an employer
Is it possible to set-off amounts due to the company against amounts due to shareholders?
Yes, provided all other debts are paid in full, if the shareholders owe amounts to the company rather than settling the debt, the liquidator can issue a Deed of Realisation and Distribution which treats the debtor realisations as capital distributions to shareholders.
How quickly can assets be distributed?
The Liquidator must be satisfied that all of the company’s liabilities have been settled in full before a final distribution is made to the shareholders’. This includes payment of the company’s tax liabilities, and the Liquidator will be required to obtain tax clearance from the relevant HMRC department.
If there are any liabilities which might take time to settle, an interim distribution could be made. This has the effect of releasing a proportion of the surplus funds to shareholders’, whilst retaining an amount which will be sufficient to cover unpaid liabilities. Where appropriate an interim distribution can be paid out within 48 hours of the commencement of the MVL.
What if the Declaration of Solvency is incorrect, or the Company becomes insolvent?
A Declaration of Solvency is a sworn statement, and directors’ swearing this document must take care to ensure that the contents are correct. In practice, we will work closely with you, and the company’s account to ensure that the financial information is correct. So long as you have acted reasonably, and based on professional advice, it is unlikely that your conduct could be severely criticized for making a declaration which was subsequently found to be wrong.
However, if there is not a sufficient margin of assets to have confidence that the company can pay its liabilities (and interest) in full, within 12 months, it would not be advisable to continue with the MVL process, and it is likely that another procedure for winding-up the company should be considered.
If, at any time, the company becomes unable to pay its liabilities due to unforeseen circumstances, the Liquidator will give notice to the company’s creditors’ which will result in the immediate conversation of the liquidation to a Creditors’ Voluntary Liquidation (“CVL”), a type of insolvent liquidation.
Where a MVL is converted to CVL the Liquidator will also need to submit a report to the Department of Trade and Industry in relation to the directors’ conduct.
When does an MVL conclude?
Depending on the complexity of the individual case, an MVL can be concluded within 3 to 6 months of its commencement, although a final distribution can be made to shareholders’ much earlier. Before the liquidation can be closed, the Liquidator must obtain tax clearance from HMRC.
Once this clearance has been obtained, and there are no other matters to resolve, the Liquidator will prepare a draft final account and deliver this proposed final account to all shareholders’ with a notice of a specified date (falling at least 8 weeks’ ahead) on which the liquidators intend to deliver the final account to them, and to the Registrar of Companies.
The liquidator vacates office when the final account is filed with the Registrar and the company itself will usually be dissolved automatically three months after the date of filing.
Is Administration or a Company Voluntary Arrangement suitable?
If the company’s business is viable in the current format, with minimal changes to its structure and day to day operations, then a Company Voluntary Arrangement (“CVA”) could be a more appropriate option than Administration. However, if the company requires immediate protection from creditor pressure, followed by complete or partial restructuring, or even a sale of the business, administration is likely to be the best option.
Is it necessary for the Company to be insolvent?
- Yes – if the application is made by the director(s) or company.
- No – if the application is made by a creditor with a qualifying floating charge.
What is the purpose of administration?
When a company enters into Administration, it must achieve one of the following purposes:-
- Rescuing the company as a going concern;
- Achieving a better result for the company’s creditors as a whole than would be likely if the company were wound up (liquidated) (without first being in administration);
- Realising property in order to make a distribution to one or more secured or preferential creditors.
The Administrator must perform these functions in the interest of the company’s creditors as a whole.
What documents must be filed in order for director(s) to appoint an Administrator?
A notice of intention to appoint an administrator by the company or director(s) incorporating a statutory declaration, and giving not less than 5 business days notice to any Qualifying Floating Charge Holder (“QFCH”) and to various other prescribed parties.
A notice of appointment of an administrator by the company or director(s) incorporating a statutory declaration, that the relevant notices have been given.
A statement by the proposed Administrator that she consents to the appointment and considers the purpose of the Administration is reasonably likely to be achieved.
When will an application to Court be required?
It will not be possible to appoint an Administrator, without first making an application to Court, where the company is already:-
- In Administrative Receivership
- Is subject to an application for Administration, which has not been disposed of
- Is subject to a petition for its winding-up, which has not been disposed of
- Is, or has in the past 12 months, been subject to a small company moratorium
What is a pre-packaged (“pre-pack”) administration?
A pre-pack administration can provide a seamless transfer of a business from one entity to another. It is often the best way of preserving value for the business, creditors and shareholders.
The term ‘pre-pack’ refers to the fact that a sale of all of part of the company’s business will be agreed with a purchaser before the insolvency process begins, and the Administrator will then complete the sale immediately after their appointment. In many cases the sale is agreed with person(s) connected in some way to the failed business.
The main benefit to this strategy is that there will be minimal disruption to the day to day running of the business, and produce enhanced realisations for creditors. This strategy is adopted in cases where it makes commercial sense to do so, and it must be demonstrated that it is in creditors’ best interests to facilitate a sale as quickly as possible.
A pre-pack administration will be a fairly quick process, and can take only a matter of weeks from the initial consultation with an IP, to the date of sale. If you are a creditor in a pre-pack administration, you will be sent detailed information as to why the pre-pack method was used when receive details of the Administration.
I have heard criticism of pre-pack Administration, why?
It is a common misconception that pre-pack administrations are used by directors who simply wish to carry on a business whilst leaving the company’s debts behind. In order to combat these concerns, the process has recently been subject to independent review (The Graham Review).
As a result of this review a number of significant changes have been made, including the formation of The Pre Pack Pool (“the Pool”). In brief, the Pool is an independent body of business professionals who, on application, will offer an opinion as to whether the proposed sale of the business appears to be reasonable.
The overall purpose is to promote transparency in relation to the process and offer reassurance that an independent body has reviewed the proposed sale, and considered whether or not is it reasonable, with specific regard to the impact on the company’s creditors.
Further information about the Pool can be found here: https://www.prepackpool.co.uk.
Will there be a meeting of creditors’?
In accordance with recent changes to insolvency law, the Administrator is no longer required to call a physical meeting of the company’s creditors. However, the Administrator must seek a decision from the creditors as to whether (or not) they approve the Administrator’s proposals.
The Administrator may seek this decision either by correspondence, electronic voting, virtual meeting, any other method which allows equal participation, or by deemed consent. The decision date must be within 10 weeks of the start of the Administration.
There are some (limited) circumstances where the Administrator is not required to seek a decision on the proposals from the company’s creditors, unless specifically requested. Where this is the case, the reasons will be clearly stated within the proposal.
What information will creditors’ receive?
The Administrator must write to all known creditors of the company as soon as possible after his (or her) appointment.
The Administrators will then send a detailed report to all known creditors of the company with 8 weeks of the appointment. This report is known as ‘the proposals’ and will confirm every step taken by the Administrator to date, and information as to the overall strategy. The proposals must be transparent and will contain information about the fees and expenses of the Administration, and the likely outcome for each type of creditor.
The Administrators are also required to provide a written update on the progress of the administration to all known creditors, every six months. This must be sent within one month of each (six monthly) anniversary until the administration is concluded.
What publicity is required?
When a company enters Administration, a notice of the appointment must be advertised in The London Gazette, and a publication which is local to the trading premises. This ensures that the appointment is brought to the attention of all creditors’, and that any claims are submitted.
Every business document (issued by the company or by the Administrator), every communication, and every website, must state that the company is ‘in Administration’ and that its affairs, business and property are being managed by the Administrator.
How will the Administration take?
As mentioned above, the Administrator must submit their proposals to creditors within 8 weeks of the start of administration.
After submitting their proposals, and seeking a decision from the creditors as to approval, it may take several months for the Administrator to conduct the administration as planned.
In general, the process should conclude within 12 months, but can take longer with the consent of the company’s creditors, or with Court approval.
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