Against a backdrop of spiralling economic pressures and a looming recession, there were 1,827 registered limited company insolvencies recorded just in the month of July 2022, most via a CVL.
The failure rate was even worse for individuals, with the Insolvency Service recording 28,946 individual insolvencies, made up of 21,578 IVAs, 5,772 DROs and 1,596 IBOs in the second quarter of 2022.
So, what do the various acronyms actually mean
CVL (Creditors’ Voluntary Liquidation)
A Creditors Voluntary Liquidation of a company (CVL) is the most common method of closing down a business by its directors and or shareholders, via an Insolvency Practitioner. If they don’t do so as soon as they become aware that they cannot pay their debts, and continue trading for a period whilst technically insolvent, the directors may face the debts of the company being transferred to them as individuals.
A CVL is a comparatively pain free and inexpensive method for a company’s affairs to be wound up without any involvement by the court, or taking the risk that company debts could be reassigned to the directors. It is a relatively simple process and should cost around £1,500 (plus VAT) but will relieve the directors of a lot of hassle and make the whole process smoother.
CVA & IVA
(Company Voluntary Arrangement & (Individual Voluntary Arrangement)
Under UK insolvency law an insolvent company can enter into a CVA, which is very similar a personal IVA. In either arrangement, the insolvency procedure allows a company or an individual with debt problems, to reach a voluntary agreement with its business creditors.
Typically, this involves repayment of all, or part of the debts over an agreed period of time. The actual CVA or IVA can only be implemented by an insolvency practitioner who will draft a proposal for the creditors. A meeting of creditors is held to see if the CVA/IVA is accepted. As long as 75% (by debt value) of the creditors who vote agree with the proposal, then the CVA/IVA is accepted.
All of the creditors are then bound to the terms of the proposal whether or not they voted. Creditors are also unable to commence further legal action as long as the terms are adhered to, and existing legal action such as a winding-up order or bankruptcy order ceases immediately.
DRO (Debt Relief Order)
DROs are suitable for debtors who have relatively low liabilities, little surplus income and few assets. They can often be a viable alternative to other insolvency measures, such as IVAs and when bankruptcy would be disproportionate; and allow vulnerable people trapped in debt to have a fresh start.
To be eligible for a DRO, a debtor’s total unsecured liabilities (debt) must not exceed £30,000; his/her total gross assets must not exceed £2000 (this includes houses) and the debtor’s disposable income, following deduction of normal household expenses, must not exceed £75 per month.
But be warned, a DRO is considered a form of insolvency, like bankruptcy, and will be subject to a public listing through the Insolvency Service website, which will affect your credit rating.
IBO (Individual Bankruptcy Order)
Bankruptcy in the United Kingdom relates only to individuals (including sole proprietors) and partnerships and should only be considered if you aren’t eligible for either an IVA or a DRO.
Unless a creditor applies to the Court for a bankruptcy order against you (often done as a crude form of pressure), you can apply online for bankruptcy at https://www.gov.uk/bankruptcy. There is an upfront fee of £680 and assuming the Official Receiver agrees to your application, you’ll receive a copy of the bankruptcy order. You may also be interviewed about your situation and which of your assets can be used to pay your debts: also, you’ll have to follow the bankruptcy restrictions.
The good news is that your bankruptcy and the associated restrictions will usually completely end when you’re ‘discharged’, which is usually automatic, 12 months after the Bankruptcy Order was made. The bad news is that the fact that you have been bankrupt can severely affect your credit rating for up to 10 years.
Tax Accountant’s view
Hopefully, most of you will not be facing the prospect of an imminent business failure because of rising debts; either as an individual or as a company director. However, if you are sadly in this position, at least now you are aware of the alternatives open to you.