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A general guide on the different kinds of corporate and personal insolvency processes in the UK.
Voluntary Liquidation can be either a members voluntary liquidation or a creditors voluntary liquidation. The main difference is that a members voluntary liquidation is a solvent process. The directors have to swear that the creditors will be paid in full within 12 months.
A CVL is commenced by the members passing a special resolution to the effect that the company cannot, by reason of its liabilities, continue its business and that it is advisable to wind up. This is usually at the directors' request because the company is insolvent and there are no appropriate rescue procedures available. As the company is insolvent, there will be no statutory declaration of solvency by the directors and there must be a meeting of the creditors.
An arrangement between a company in financial difficulties and its creditors. It is also available to LLPs (called a “partnership voluntary arrangement”). CVAs are put in place so that the company can either exit or avoid altogether other insolvency processes.
An insolvency process for Scottish and English companies. The company is placed under the control of an insolvency practitioner to enable him to recuse the company as a going concern. If this is not possible, the administrator must achieve a better result for creditors than would be the case if the company were put into liquidation. If this is not possible then the administrator realises assets to make a distribution to creditors.
Compulsory liquidation (or winding up by the court) is a procedure by which the assets of a company are sold, and the proceeds are distributed to the company's creditors. A court order is required to put a company into compulsory liquidation. At the end of the liquidation, the company is dissolved.
Bankruptcy is a process available to individuals in England by which the assets of a debtor are realised and distributed amongst their creditors. All of the debtor’s assets vest in the Trustee in Bankruptcy who then realises what value they have and distributes the proceeds rateably amongst unsecured creditors. Sequestration is the Scottish equivalent of Bankruptcy and is available to Scottish individuals and Scottish ordinary (unincorporated) partnerships. In Scotland, the Trustee in Bankruptcy is called a Trustee in Sequestration.
Whilst bankrupt, a debtor cannot: (1) be a director or partner of an LLP; (2) get credit of more than £500; (3) practice as a solicitor; (4) act as a trustee of a charity or pension trust. Bankruptcy of one partner may dissolve a partnership.
An IVA is an agreement between an individual debtor and his creditors in England and Wales. It allows a debtor to pay a proportion of his debts and come to an arrangement with creditors over payment. In Scotland, this is called a Trust Deed.
As with IVAs, the effect of a trust deed on a debtor is less severe than with sequestration, so may be the preferred option for professional individuals, such as solicitors.
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This page provides you with a broad overview of Corporate & Personal Insolvency processes in Scotland, England and Wales as at September 2016. It is not designed to constitute legal advice and as such if your business is experiencing financial difficulty it is recommended that you always seek independent legal and financial advice.
For further information about the compensation provided by the FSCS, refer to the FSCS website at www.fscs.org.uk/. You can also visit our Financial Services Compensation Scheme page for more details.