Sometimes a company or a person might not be able to pay the unpaid debt. This article will describe what actions may be taken when a company or person enters into insolvency.
A company is insolvent when it cannot pay its debts when they are due for payment. Voluntary administration, liquidation and receivership are the most common procedures if that occurs. When a company enters into insolvency actions must be taken. If a director allows the company to trade while being insolvent, the director may face serious punishments.
Voluntary Administration is a procedure where an external administrator is appointed by the director of the company. There is also the possibility that he gets appointed by a secured creditor with charge over most of the company’s assets. A liquidator or a provisional liquidator may also appoint an administrator. However it is most common for the director to appoint the administrator. He is called ‘voluntary administrator’, and his or her task is to investigate the company’s affairs. The result from the investigation should then be reported back to the creditors. Further, there should be a recommendation whether the company should be liquidated, enter into a company arrangement or be returned to the directors.
Liquidation means the winding up of a company’s affairs. There are three types of it. These are liquidation as a result of a court order, liquidation initiated by the company, called creditors’ voluntary, and member’s voluntary. The liquidation of the company is taken care of by a liquidator, who has a duty to all creditors of the company.
During the process of liquidation, the company’s assets are realised and its operations are ceased or sold. The earnings from the realisation are distributed among the company’s creditors and the shareholders share the surplus.
The third process, receivership, usually begins after a secured creditor with security over some or all of the company’s assets appoints a receiver. His task is to collect and sell as much of the company’s assets. This is needed to cover the debts owed to the secured creditor.
If a person is not able to manage his or her unpaid debt, there are several options available to solve the financial situation. The first step is to contact the creditors directly and discuss about the payment details in a more informal way. If that is not possible or enough, one of the four formal options available may be considered. The options are to present a declaration of intention (DOI), a debt agreement, a personal insolvency agreement (PIA) or to file for bankruptcy.
Declaration of Intention (DOI)
DOI is a temporary relief for 21 day, during which period unsecured creditors are not allowed to take any actions to recover the debts. The period is for the person to decide whether to proceed with bankruptcy or if another option is desired.
A debt agreement is a binding agreement between the person and the creditors. In the agreement, these will accept a sum of money based on the ability of the person to pay.
Personal Insolvency Agreement (PIA)
A PIA is an agreement with the creditors to settle the debts in a way in which they will be paid full or in part. The PIA may include a lump sum payment, transfer of assets or payment for the sale of assets or a payment arrangements with the creditors. An appointed controlling trustee has a look at the PIA in regards to the financial situation of the person. He also makes a recommendation to the creditors whether it is in their interest to accept the PIA or not.
Bankruptcy is the last option available for a person who cannot manage his or her unpaid debt. A person can become bankrupt either voluntarily or after a creditor’s application. Bankruptcy has serious consequences, and several restrictions and duties will be placed upon the person. For example, the assets of the person may be sold, he or she might be required to pay a certain amount of his or her income to the creditors and he or she might need to surrender his or her passport. The possibility to obtain credit in the future might also be affected. To administer the bankruptcy, a trustee is appointed.
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