While insolvency law can seem intimidating, it actually exists to serve a very important purpose, namely to ensure the orderly wind-up of a company. When a company goes into insolvency, there are three groups of people who feel the main impact of it, they are creditors, staff (directors and employees) and shareholders. Insolvency law gives each of these group a framework on which to build their expectations.
It is the duty of the insolvency practitioner to ensure that the company’s assets (both tangible and intangible) are monetised to their fullest extent and that the proceeds from their sale are divided amongst all creditors on a fair basis. This means that secured creditors are paid first and must be paid in full before any money is paid to unsecured creditors. If there is not enough money to pay back all secured creditors in full, then the funds must be distributed amongst all creditors on a proportionally-equal basis. This removes the possibility that better-resourced creditors could grab funds at the expense of smaller-scale creditors because creditors do not directly battle each other for funds, they get what they are given by the IP.
When it come to insolvency, the term “staff” can be split into two groups, employees and directors. In terms of insolvency law, there is a very clear distinction between them.
In simple terms, the IP will attempt to pay staff statutory payments such as wages due and holiday pay accrued. If there is insufficient funds to do so then staff may apply to have the money out paid by National Insurance, up to statutory maximums.
For directors, the issue is likely to be less about getting funds from a company (if they are owed funds by the company, they will be treated in the same way as any other creditor) as ensuring that they can not subsequently be held liable for any funds owed by the company to other people. In very simple terms, there some exceptions to the general principle that the liabilities generated by a limited company, remain with the limited company with the result that, in certain circumstances, former directors of limited companies can be held personally liable for the debts generated by the company. This means that if creditors are not paid in full, they could be very highly motivated to look for any legal pretext they can find to pursue former company directors for the money they are owed and if they can produce any sort of case, even a questionable one, the individuals in question may find themselves facing the difficult decision of whether to swallow a settlement or whether to go through the time and effort of fighting their case, knowing that they might lose and then find themselves even worse off. A good insolvency practitioner will be able to guide directors as to how to minimise or even eliminate this risk (in a legal manner).
Investors are the last people in line to receive any funds when a company becomes insolvent, but they can still benefit from the services of an insolvency practitioner. The reason for this is that, in spite of their name, insolvency practitioners do not necessarily simply come into a company and start winding it up. They will look to see what options are available to the company and they may find solutions which had not occurred to the board of directors. As a result, they may even be able to save the company, or at least a part of it (as in the case of pre-pack administration). If they do, then shareholders may still be able to benefit from their investment.