Insolvencies on the Up?

As insolvencies, both of companies and individuals, are on the up and the press report weekly of the gloom in our economy it is important to assess the measures available for both creditors and debtors should they find themselves in one of these processes.

If you are a creditor now is a good time to monitor your exposure to high risk debtors and review all leases, loans and major contracts.  Is the debt you are owed secured or unsecured? Is the debt guaranteed?  What are your rights if the debtor defaults in payment?  It is worth looking at these issues now before it is too late.

Equally if you are a debtor and facing demands for payment that you cannot meet or the bank are pressing for a restructuring of your facilities and an increase to their security it is important that you too look at the various options for restructuring and/or protection at an early stage before matters become out of control.

Both for a creditor, whose final route of recovering is insolvency proceedings against a debtor, and a debtor, whose only means of protection is under a formal insolvency, knowing the various options is important.

Voluntary Arrangements
This can apply to either companies or individuals and should be the first option for a stressed debtor to consider. It is a form of rescue whereby the debtor enters into a contract with its creditors for the payment of at least a portion of the sum due to each of them.  It requires the support of 75% in value of creditors to work.  Of course for a creditor to sign up to a voluntary arrangement it would have to be satisfied that it is yielding a better return than that it would receive from a formal bankruptcy or liquidation.

Liquidation/ Bankruptcy
Liquidation is the term applied to limited companies. Bankruptcy to individuals. Either way this constitutes absolute closure.  It involves the appointment of an insolvency practitioner to control and collect in all the assets and distribute them to creditors in a prescribed statutory order.  It is a moratorium of the creditors actions against the debtor and can prove to be a welcome cut off to those in deep financial strife.

Administration
This applies to companies only. It involves the appointment of an insolvency practitioner to take control of the business with a view to it trading out of its difficulties.  Creditors are precluded from taking action against a company in Administration and must deal directly with the Administrator so far as outstanding debts are concerned.

Each of these formal insolvency procedures are appropriate only for specific circumstances.  Therefore whether you are a debtor or a creditor it is essential to consider which one (if any) best achieves your end.  Acting before someone else acts can mean that you retain some control over a difficult situation.

The key is to analyse the position with the benefit of expert assistance and not leave the warning signals until it is too late.

For questions on issues discussed in this article, please contact Toby McMurray, Associate Solicitor, Litigation Department on Belfast 028 9055 3300 or email, toby.mcmurray@tughans.com.

The content of this article is provided for information purposes only and does not constitute legal or other advice.