Types of Formal Insolvency

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Business owners tend to have the same daily problem of dealing with the pressures caused by cash flows. It may be caused by either short-term factors like a problem of contract, long-term factors like increased competition, or positive factors such as the need for additional money as working capital for new contracts.

insolvency issues

Since the problems caused by cash flows are pretty common, there are actually a lot of professionals who can help you solve your insolvency issues especially when you are in Israel. You can take legal and financial advice from a business advisor or an insolvency lawyer from Israel like מאור לוי as the first step that needs to be taken.

But what does insolvency really means? Well, in layman’s terms, it basically means being unable to pay current and future obligations. You can sort insolvency in two ways: Balance Sheet Insolvency and Cash Flow Insolvency. The former is when a company’s liabilities and obligations outweigh its assets, while the latter is when a company can no longer pay its debts upon the deadline.

Furthermore, cash flow insolvency can also result in a balance sheet insolvency. Once the business has ceased trading due to being unable to pay debts in time, its assets’ value will surely depreciate and need to be written down, forcing the company to sell its properties on a lesser or discounted value.

What are the types of Formal Insolvency Procedure

types of Formal Insolvency

Administration

Administration is the most highly profiled of all insolvency procedures. Once the board of directors seeks to save the company and a Company Voluntary Agreement (CVA) isn’t enough, then the Administration can take part. It can be instigated by the directors or the company itself. Administration is often used in maximizing realizations for the advantages of the creditors which could either be through a sale of the business or a managed wind down.

Company Voluntary Arrangement

A CVA is used in facilitating the rescue of a business firm that suffered from a crisis or event. The board of directors will remain in control with an insolvency practitioner who will oversee the whole process. It is dependent on the 75% voting of the creditors who are in favor of the CVA proposal in which the secured and preferential creditor’s rights will remain as is except if they consent to any changes. If the CVA is approved, creditors will be bound by its terms that last for 3-5 years.

Liquidation

Liquidation is a more appropriate choice since there is no probability of rescuing the company. As long as the business is solvent, shareholders can put the firm into a Member’s Voluntary Liquidation (MVL). A liquidator is tasked with distributing the remaining assets to all stockholders in a tax-efficient way. The distributions will be treated as capital distributions, not income distributions, from a tax perspective.

Receivership

A receiver is appointed by a creditor with a fixed fee over the assets of the company. There are two types of a receiver: Fixed Charge Receiver and  Law of Property Act (LPA) Receiver. Either of the receivers has limited power that is generally to realize the business’ assets for the benefit of the holder of the charge.