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WHAT THE TERMS MEAN
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Administrative receivership
A creditor with a 'floating charge security against the firm (usually a bank) loses confidence and sends in an administrative receiver. The main difference from administration is that this expert is not court-appointed and represents the interests of the secured lender.
Administration
Any creditor or director can apply to the court to start an insolvency proceeding. The court looks at indicators of insolvency to ensure that it is necessary and not a malicious action. These indicators include the company's cash flow and liquidity ratio, its ability to borrow, other complaints, summonses or creditors and whether accounts have been submitted.
An administrator (insolvency practitioner) is then appointed by the court to bring about the best possible financial result for the creditors. This is a broader duty than that of the receiver who simply wants his client's money back. If possible, the administrator will keep the firm trading in order to sell it for the best price.
Occasionally the assets are bought by the existing owners or management which, while not illegal, presents some ethical difficulties. Livesey says: "This is a grey and contentious area for the industry. Administrators work to get the best deal and it is a risky strategy for anyone hoping to simply offload debt as someone else can step in and buy the f irm from under them for more money."
Since changes were made to the law in 2003, directors can inform the court of their decision to enter administration without having to attend a hearing. Administration can be temporary if the company can trade its way back from insolvency.
Accelerated sales process
Having recognised the difficulties, an effective way for management and administrators to save a viable business is to enter into talks with
a buyer. When all parties are satisfied about the company's future and price, administration can be declared on day one and the business sold on day two. This has the advantage that trading reed not be damaged, jobs have the best chance of survival and the maximum money is obtained for the creditors.
Liquidation
The company ceases trading. An administrator is sent in to sell the assets and distribute the proceeds among creditors,
Corporate voluntary arrangement (CVA)
This is not a very common procedure, but it is one way out of financial difficulties. It comes down to the management striking a deal with creditors. If the company goes bust, lenders may get nothing — but if they strike a deal they could receive repayment of a percentage of their debt. on the condition they wait for the remainder. This would give the company a chance to trade its way out of trouble. Sometimes CVAs are used as a route out of administration
Director's responsibilities
There are two possible problems for directors of failed firms. One is an allegation of wrongful trading — ie carrying on when you should have called it a day. The other is an allegation of fraudulent trading, which is a clear act of illegality.
Either one can see you barred from directorship. Fraudulent trading is fairly cut and dried — most people do not try to be dishonest. Wrongful trading, however, is more of a value judgement. "It's always a grey area as to what point directors should call someone in," says Livesey. "But continuing to trade and doing nothing will just cause more problems."
Any decision as to whether directors have been wrongful or illegal in their actions is for the courts to make.