Types of Insolvency
The three most common types of corporate insolvency are voluntary administration, liquidation and receivership.
What is a voluntary administration?
Voluntary administration is where the directors of a financially troubled company or a secured creditor with a charge over most of the company’s assets appoint an external administrator called a ‘voluntary administrator’.
The role of the voluntary administrator is to investigate the company’s affairs, to report to creditors and to recommend to creditors whether the company should enter into a deed of company arrangement, go into liquidation or be returned to the directors.
A voluntary administrator is usually appointed by a company’s directors, after they decide that the company is insolvent or likely to become insolvent.
What is a liquidation or a winding up?
Liquidation is the orderly winding up of a company’s affairs. It involves selling the company’s assets and distributing the proceeds among creditors and distributing any surplus to shareholders. The three types of liquidation are:
- creditors’ voluntary, and
- members’ voluntary.
A creditors’ voluntary liquidation is a liquidation initiated by the company. A court liquidation starts as a result of a court order, made after an application to the court, usually by a creditor of the company.
What is a receivership?
A company most commonly goes into receivership when a receiver is appointed by a secured creditor who holds security or a charge over some or all of the company’s assets. The receiver’s primary role is to collect and sell enough of the company’s charged assets to repay the debt owed to the secured creditor.
What is a deed of company arrangement (DOCA)?
A DOCA is a binding arrangement between a company and its creditors governing how the company’s affairs will be dealt with, which may be agreed to as a result of the company entering voluntary administration. It aims to maximise the chances of the company continuing, or to provide a better return for creditors than an immediate winding up of the company.