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What is an Insolvency Practitioner?

First of all, let’s take a look at what the work “insolvency” means – it’s the inability to pay the money owed (whether by a company or an individual) on time.  There are two types of insolvency:  cash flow insolvency and balance sheet insolvency. 

Cash flow insolvency occurs when a company or individual has enough assets to pay the debt owed but does not have the appropriate form of payment.  For example, an individual may own a house, car and other items of value but does not have enough liquid assets (cash) to settle a debt on its due date.  Cash flow insolvency is usually able to be resolved via a negotiation process.

Balance sheet insolvency occurs when a company or individual does not have enough assets to pay all of their debts.  This may result in the company or person entering a state of bankruptcy unless a process of negotiation enables them to resolve the situation without bankruptcy. 

Insolvency legislation here in the UK focuses on remodelling of the organisational and financial structure of debtors to enable the rehabilitation and continuation of their business, this is termed business turnaround or business recovery.  Achieving a business turnaround can take several forms which include:

  • Keep and restructure
  • Sale as a going concern
  • Wind down and exit

A company which is insolvent may be put into liquidation and this process can be instigated by directors and shareholders without court involvement by shareholder resolution and the appointment of a licences insolvency practitioner as the liquidator.  The liquidation will not be legally effective without convening a meeting of creditors who then have the ability to appoint a liquidator of their choice.  This is known as creditors’ voluntary liquidation (CVL) as opposed to a members’ voluntary liquidation (MVL) which is for solvent companies. 

When a company is in administration it is protected from its creditors so that operational changes or restructuring can be carried out enabling it to continue as a going concern.  Here in the UK a licensed insolvency practitioner will be appointed as Administrator to manage the company’s affairs and protect the creditors of an insolvent company and balance their respective interests.

A process known as “pre pack administration” is becoming common in the UK in which the Administrator completes a pre-arranged sale of the company’s business (often to its directors or owners).  The creditors have no opportunity to vote against the sale.  However a creditor who holds security over an asset of the company may have the power to appoint an insolvency practitioner as administrative receiver.  Receivership often results in the rescue of a company’s business via a sale, but not a rescue of the company itself. 

Insolvency practitioners in the UK are overseen and inspected by their recognised professional body and are licensed to advise on and undertake appointments in all formal insolvency procedures. There are around 2,000 Licensed Insolvency Practitioners in the UK and licenses are issued by the following professional bodies:

  • Insolvency Practitioners Association
  • Association of Chartered Certified Accountants
  • Institute of Chartered Accountants in England and Wales
  • Institute of Chartered Accountants of Scotland
  • Institute of Chartered Accountants in Ireland
  • Law Society of Scotland
  • The Solicitors Regulation Authority