Part 2 Insolv Basics

Where a compulsory liquidation follows immediately on an administration, the court may appoint the former administrator to act as liquidator. In these cases, the official receiver does not become liquidator, but retains an investigative duty.
A compulsory liquidation is the only form of liquidation that may be applied to insolvent partnerships in England, Wales and Northern Ireland. Such circumstances may result in individual partners entering bankruptcy or individual voluntary arrangements.
PROCEDURE FOR COMPULSORY LIQUIDATION – ENGLAND, WALES AND NORTHERN IRELAND
1. Petition
Usually presented by a creditor on grounds of insolvency. May also be presented by the company itself or the shareholders. Petition is usually advertised in the Gazette.
2. Winding-up order made by the court
3. Official receiver
Becomes liquidator by virtue of the winding-up order (unless the court appoints a former administrator). Has a duty to investigate the company’s affairs and send a report to the creditors. Advertises order in Gazette and appropriate newspaper. The official receiver may call a meeting of the creditors to appoint an insolvency practitioner as liquidator in his place.
4. Creditors’ meeting
Convened by the official receiver within four months of the winding-up order. Liquidator is appointed by a straight majority, in value, of the creditors. Meeting may also establish liquidation committee.
5. Duties of liquidator
Realise assets. Agree creditors’ claims and distribute funds by way of dividend. Call final meeting of creditors. Creditors receive an account and report of the liquidation.
Compulsory Liquidation (Scotland)
In Scotland compulsory liquidation is often referred to as ‘court liquidation’. The procedure is similar to the process of compulsory liquidation in England, Wales and Northern Ireland, but there are important differences. In Scotland there are no official receivers, so all liquidations are dealt with by licensed insolvency practitioners. In granting the winding-up order the court appoints an insolvency practitioner as interim liquidator. The interim liquidator then convenes a meeting
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of creditors to appoint a liquidator, who may or may not be the same person as the interim liquidator.
PROCEDURE FOR COMPULSORY LIQUIDATION – SCOTLAND
1. Petition
Usually presented by a creditor on grounds of insolvency. May also be presented by the company itself or the shareholders. Petition is usually advertised in the Edinburgh Gazette and an appropriate newspaper.
2. Winding-up order made by the court
3. Interim liquidator (Scotland)
Appointed by the court on the granting of the winding-up order, with the
job of convening a meeting of creditors which will appoint a liquidator.
4. Creditors’ meeting
Convened by the interim liquidator within 42 days of the winding-up order. Liquidator is appointed by a straight majority, in value, of the creditors. Meeting may also establish liquidation committee.
5. Duties of liquidator
Realise assets. Agree creditors’ claims and distribute funds by way of dividend. Call final meeting of creditors. Creditors receive an account and report of the liquidation.
Creditors’ Voluntary Liquidation (CVL)
A CVL is a liquidation begun by resolution of the shareholders, but is under the effective control of the creditors, who can appoint a liquidator of their choice. Because of changes in legislation placing greater onus of responsibility on the directors of a company, the CVL is the most common way for directors and shareholders to deal voluntarily with their company’s insolvency. This is because it is in the interests of the directors to take action at an early stage, in order to minimise the risk of personal liability for wrongful trading. Furthermore, unlike a compulsory liquidation, a CVL does not bring the directors’ conduct under the scrutiny of the official receiver, although the liquidator is required to report to the DTI on the conduct of the directors.
It is also possible for a liquidation to proceed as a CVL without the need for a creditors’ meeting, where it follows immediately on the conclusion of an administration and there are funds available for the unsecured creditors. The liquidator will be the administrator, or other person previously approved by the creditors.

PROCEDURE FOR CVL
1. Directors consult a licensed insolvency practitioner
2. Calling of meetings
Notice and proxy forms sent to shareholders and creditors. Creditors’ meeting advertised in the Gazette and two appropriate newspapers.
3. Shareholders’ meeting
Extraordinary resolution to wind up and an ordinary resolution to appoint a liquidator. (95% in value of shareholders can agree to short notice).
4. Creditors’ meeting
Must be within 14 days of shareholders’ meeting (but usually follows immediately).
5. Statement of affairs and report on history of business and causes of failure presented to meeting
6. Shareholders’ nominee remains as liquidator unless majority by value of creditors voting appoint an alternative
7. Appointment of liquidation committee
8. Duties of liquidator
Realise assets. Investigate company’s affairs. Agree creditors’ claims and
distribute funds. Hold annual meetings of creditors. Call final creditors’
meeting. Creditors to receive an account and report of the liquidation.
Other Procedures
Fixed Charge Receivership (England and Wales)
Receivers may also be appointed by secured creditors over specific assets covered by a fixed charge, such as properties, aircraft, machinery or book debts. The appointment of receivers over properties is partly governed by the Law of Property Act 1925 (LPA) and such receivers are sometimes known as LPA receivers. Receivers under fixed charges have more restricted powers than administrative receivers, with no general powers of management over the company. Such receivers do not need to be licensed insolvency practitioners and such procedures are not generally suitable for company rescue. Fixed charge receiverships are not used in Scotland. Secured creditors simply repossess the subjects of their mortgage.
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Scheme of Arrangement
A term normally used to describe a compromise or arrangement between a company and its creditors or members or any class of them under section 425 of the Companies Act 1985, which may involve a scheme for the reconstruction of the company. If a majority in number representing three fourths in value of the creditors or members or any class of them agree to the compromise or arrangement it is binding, provided it is sanctioned by the court. Section 425 may be invoked where there is an administration order in force in relation to the company, where there is a liquidator or provisional liquidator in office, or where the company is not subject to any insolvency proceedings.
Members’ Voluntary Liquidation (MVL)
An MVL can only be used for a solvent company, and is under the control of the shareholders, who appoint the liquidator. There may be a number of reasons for closing down a solvent company. The proprietors may wish to unlock their capital and retire, or a group of companies may wish to close down a subsidiary which has outlived its usefulness and only exists on paper. MVLs are also used in corporate restructurings.
PROCEDURE FOR MVL
1. Declaration of solvency
Directors must swear the declaration within five weeks preceding the resolution to wind up. It must embody a statement of the company’s assets and liabilities and a statement that all creditors have been paid in full, with interest, or will be within twelve months. It is a criminal offence to swear a false declaration.
2. Resolution to wind up
Extraordinary meeting of members on 21 days’ notice to pass resolution to wind up. No meeting of creditors required.
3. Appointment of liquidator
By ordinary resolution of members immediately after the passing of the resolution to wind up.
4. Duties of liquidator
Realise assets. Settle and pay creditors’ claims plus statutory interest. Distribute surplus to members. Hold final meeting of members.
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Section 6 – Personal Insolvency
There are several types of insolvency procedure available to the individual, depending on their circumstances. These are:
• bankruptcy (England and Wales and Northern Ireland)
• individual voluntary arrangement (IVA) (England and Wales and Northern Ireland)
• sequestration (Scotland)
• trust deed or protected trust deed (Scotland)
Note: The official receiver has no concern with the insolvency of individuals in Scotland.
Bankruptcy – England and Wales and Northern Ireland
Bankruptcy is the administration of the affairs of an insolvent individual by a trustee in the interests of his creditors generally. The trustee’s function is to realise the assets and distribute them among the creditors in a prescribed order of priority.
Bankruptcy proceedings commence with the making of a bankruptcy order by the court. Immediately on the making of the order, an official called the official receiver becomes receiver and manager of the bankrupt’s estate, pending the appointment of a trustee. The official receiver is an officer of the court and a member of the Insolvency Service, an executive agency within the Department of Trade and Industry. Where there are significant assets, an insolvency practitioner will usually be appointed to act as trustee, either by a meeting of creditors or by the Secretary of State for Trade and Industry. Where no insolvency practitioner is appointed, or where there is a vacancy in the office of trustee, the official receiver acts as trustee.
An application for a bankruptcy order may be made by any creditor owed more than £750, or by the individual himself. Subject to certain exemptions, once the order is made, control of the bankrupt’s assets pass to the official receiver and then to the trustee. The bankrupt loses any rights to his property apart from any equipment needed by him for use in his business, and basic domestic equipment such as clothes, bedding and furniture, and certain pension rights.
There are special rules regarding the bankrupt’s home. Generally speaking, if the bankrupt has equity in a house, it may have to be sold. However, the law discourages a trustee from taking steps to force a sale through the court during the first 12 months of the bankruptcy where the bankrupt is married or has young children living with him. New rules introduced in April 2004 give the trustee three years from the date of the bankruptcy order to sell the house or otherwise deal with the bankrupt’s interest in it. If he does not do so within that time, the property will revert to the bankrupt. And if the value of the equity is less than £1,000, the trustee will not be able to sell it at all.
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There are certain restrictions of bankruptcy which usually last until the bankrupt is discharged (although his assets remain with the trustee).
If the bankrupt has surplus income above his needs and those of his dependants, he may be required to make contributions to his creditors for up to three years. Until his discharge, the trustee may also claim any property acquired by the bankrupt after the bankruptcy order, such as assets left to him in a will.
During the bankruptcy the bankrupt is subject to certain restrictions. For example he must not obtain credit of more than £500 from anyone without telling that person that he is an undischarged bankrupt, he must not carry on business under a name different from that under which he was declared bankrupt without disclosing the fact that he is an undischarged bankrupt, and he may not act as a company director without the court’s consent. His credit rating will also be affected.
The bankrupt will usually be discharged from bankruptcy automatically after one year, or even sooner if the official receiver decides to close his file early. Once discharged, the bankrupt is released from his bankruptcy debts, with some exceptions such as court fines, matrimonial debts and certain student loans. After he has been discharged, the bankrupt does not have any right to take back from the trustee any property that was part of his estate in the bankruptcy, and the trustee will remain in office for as long as is necessary to sell the property and distribute the proceeds to the creditors.
The disabilities of bankruptcy may remain if the official receiver applies to court to impose a bankruptcy restrictions order or the bankrupt agrees to sign a bankruptcy restrictions undertaking. These can last for up to 15 years.
PROCEDURE FOR BANKRUPTCY
1. Petition
Presented by a creditor or the debtor on grounds of insolvency, or by the supervisor of a voluntary arrangement in appropriate circumstances.
2. Bankruptcy order made by the court
3. Official receiver
Becomes the receiver of the bankrupt’s estate by virtue of the bankruptcy order. He has a duty to investigate the bankrupt’s affairs and send a report to the creditors. May call a meeting of creditors to appoint a licensed insolvency practitioner as trustee.
4. Creditors’ meeting
Convened by the Official Receiver within three months of the bankruptcy order. A trustee is appointed by a simple majority in value of the creditors. The meeting may also establish a creditors’ committee.
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5. Duties of trustee
Realise assets comprised in the bankrupt’s estate. Agree creditors’ claims and distribute any funds by way of a dividend. Call final meeting of creditors at which the creditors receive an account and report on the administration of the estate.
Individual Voluntary Arrangement (IVA)
The IVA is a less formal procedure open to insolvent individuals (even those who are already subject to bankruptcy proceedings). The procedure is flexible and its exact nature varies from case to case depending on the terms of the proposal. By entering into an IVA with the agreement in excess of 75% by value of the creditors who vote on it at a creditors’ meeting, the debtor may be able to order his affairs in a way which benefits his creditors but would not be possible under bankruptcy: for example, by an orderly disposition of assets, introduction of third-party funds, contributions from future earnings, or debt rescheduling. The agreement is overseen by a supervisor, and is binding on all creditors, whether they voted for it or not.
Except where the debtor is bankrupt when he makes the proposal, only a licensed insolvency practitioner can act as supervisor of an IVA. If the debtor is bankrupt, the official receiver can act as supervisor, and a simplified procedure called a ‘fast track’ can be used, which does not involve a creditors’ meeting. It still requires a 75% majority by value of creditors to approve the proposal.
An IVA cannot affect the rights of secured (eg mortgagees) or preferential creditors except with their express agreement.
The IVA’s benefits are its flexibility, its lack of publicity compared with bankruptcy, and the fact that it may be cheaper to administer for the creditors than a bankruptcy and is therefore likely to increase returns to the creditors.
The procedure, introduced in the 1986 Insolvency Act, has been growing in popularity and now accounts for about one in three personal insolvencies.
PROCEDURE FOR IVA
A. Non ‘fast-track’ cases
1. Proposal
Prepared by debtor with assistance from a licensed insolvency practitioner.
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2. Interim order (optional)
Application to court. Court may stay all other legal procedures. No bankruptcy petition can be heard, nor other legal action against debtor or property. A debtor may not apply for an interim order within 12 months of a previous one.
3. Nominee’s report
Nominee must be a licensed insolvency practitioner. If nominee’s report is adverse, any interim order ceases. If nominee’s report is positive, recommends meeting of creditors.
4. Creditors’ Meeting
Held between 14 and 28 days of nominee’s report. Proposal, statement of affairs, and nominee’s report considered by creditors. Proposal accepted by creditors if approved by in excess of 75%, by value, at meeting. Supervisor appointed (must be a licensed insolvency practitioner).
5. Duties of Supervisor
Reports to court. Implements proposals.
B. ‘Fast-track’ cases
1. Debtor must be undischarged bankrupt
2. Proposal
Agreed by debtor with official receiver.
3. Agreement of creditors
Official receiver sends proposal to creditors for approval or rejection by correspondence. Proposal accepted if approved by 75% in value of creditors responding.
4. Implementation
If approved, official receiver reports to court and becomes supervisor.
Sequestration – Scotland
The principle of a formal personal insolvency procedure under the control of the court is similar in Scotland, where it is known as sequestration. It is governed by the Bankruptcy (Scotland) Act 1985 as amended by the Bankruptcy (Scotland) Act 1993. The court representative is the Accountant in Bankruptcy who will act as trustee in small insolvencies where there are unlikely to be funds to pay a private insolvency practitioner. The Accountant in Bankruptcy is also responsible in all cases for overseeing the licensed insolvency practitioners appointed as trustees and all sequestrations.
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Debtors (bankrupts) are automatically discharged from the debts after three years, and property comprised in the estate remains with the trustee until his discharge. The trustee or any creditor can apply for deferments of the discharge to a maximum of two years, on cause shown. This application must be made before the end of the three year period. Further applications may be made on expiry of the existing deferment.
Partnerships in Scotland have a separate legal personality, unlike English partnerships, and are subject to the same insolvency regime as individuals. They are therefore sequestrated too, and none of the corporate insolvency processes are applicable.
PROCEDURE FOR SEQUESTRATION
1. Petition
The application to the court for commencement of bankruptcy is done by way of a petition to the court presented by a creditor or the debtor on grounds of insolvency. Once a trustee is appointed, any further order for exercise of powers can be dealt with by further application to the court by petition. This might be used, for example, to reduce a gratuitous alienation or unfair preference.
2. Interim Trustee
Appointed by the court to preserve the estate and to call the first meeting of creditors.
3. Permanent Trustee
Elected by meeting of creditors. Where there is no such election the Interim Trustee may be appointed as Permanent Trustee by the court. Commissioner(s) (creditors’ committee) may be appointed. The Accountant in Bankruptcy acts where insufficient funds are available to cover the costs of bankruptcy.
4. Duties of Trustee
Realise assets and distribute between the creditors in order of priority, in the same way as under a Protected Trust Deed (see below).
Trust Deed or Protected Trust Deed
In Scotland the less formal procedure, loosely equivalent to the IVA and available to individuals and partnerships, is the Trust Deed. By signing a simple document the debtor vests in the trustee his/her assets for behoof of the creditors and empowers the trustee to apply for sequestration if necessary. This is a more informal procedure and allows the option of bringing the trust deed to a close when the creditors’ proposals are met. Because there is an incentive for the
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debtor to meet the terms, creditors are likely to benefit from increased income-based contributions and level of cooperation. Administration costs can also be much reduced.
The procedure has gained much popularity since the 1993 amendments to the Bankruptcy (Scotland) Act 1985, which resulted in restrained access to publicly funded sequestration.
PROCEDURE FOR TRUST DEED OR PROTECTED TRUST DEED
1. Trust Deed
Signed by debtor in favour of a licensed insolvency practitioner.
Witnessed by one person.
2. Trustee
Puts a proposal to creditors and advertises for objections in the Edinburgh Gazette. He may or may not call a meeting of creditors.
3. Protected Trust Deed
Status gained if five weeks expire without objections from a majority in number or one third in value of creditors. Minority objectors bound by terms of Trust Deed.
4. Duties of Trustee
Realise assets, collect contribution from debtors’ income, agree creditors’ claims and distribute funds by way of a dividend. Account to creditors for intromissions before closing Trust Deed.
Note: If the Trust Deed fails to become protected, the Trustee, the debtor or the
creditors are free to petition for sequestration.
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Section 7 – Glossary of Insolvency Expressions for England and Wales
Note: The definitions and explanations are not intended to be exhaustive summaries of the law. If you require assistance with any insolvency related matter, R3 members are available to advise you. Italicised expressions are defined elsewhere in the glossary.
Administration
Administration is a process which places a company under the control of a licensed insolvency practitioner and the protection of the court to achieve a specified statutory purpose. The purpose of administration is to save the company, or if that is not possible, to achieve a better result for creditors than in a liquidation, or if neither of those is possible, to realise property to enable funds to be distributed to secured or preferential creditors.
Administration Order
An administration order is:
(1) a court order placing a company that is, or is likely to become, insolvent under the control of an administrator in order to achieve the purpose of administration, following a petition by the company, its directors, its liquidator or a creditor.
(2) the administration of the insolvent estate of a deceased debtor
(3) county court process permitting an individual with modest debts to pay off by instalments; no licensed insolvency practitioner is involved.
Administrative Receiver
An administrative receiver is a licensed insolvency practitioner appointed by the holder of a floating charge covering the whole, or substantially the whole, of a company’s property. He can carry on the company’s business and sell the business and other assets comprised in the charge to repay the secured and preferential creditors. Sometimes abbreviated to receiver.
Administrative Receivership
Administrative receivership is the term applied when a person is appointed as an administrative receiver. Commonly abbreviated to receivership.
Administrator
An administrator is a licensed insolvency practitioner appointed to manage the affairs of a company to achieve the purpose of administration set out in the Insolvency Act 1986. The administrator will need to produce a plan, known as his proposals, for approval by the creditors to achieve this.
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Agricultural Receivership
Agricultural receivership is a specialist remedy available to a secured creditor to take control of the assets of a farmer under the Agricultural Credits Act 1928.
Associates
Associates of individuals include family members, relatives, partners and their relatives, employees, employers, trustees in certain trust relationships, and companies which the individual controls. Associates of companies include other companies under common control (see also connected persons).
Bankrupt
A bankrupt is an individual against whom a bankruptcy order has been made by the court. The order signifies that the individual is unable to pay his/her debts and deprives him/her of his/her property, which is then realised for distribution amongst his creditors.
Bankruptcy
Bankruptcy is the process of dealing with the estate of a bankrupt.
Bond
A bond is Insurance cover to protect the uncharged assets of an estate, needed by a person who acts as a licensed insolvency practitioner.
Break-up Sale
A break-up sale is the dismantling of a business. Trading ceases and the assets are sold off piecemeal.
Charge
A charge is a right given to the creditor to have a designated asset of the debtor appropriated to the discharge of the indebtedness, but not involving any transfer either of possession or ownership.
Charging Order
A charging order is a court order placing restrictions on the disposal of certain assets, such as property or securities, given after judgement and gives priority of payment over other creditors.
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Company Directors Disqualification Act (1986)
The Company Directors Disqualification Act (1986) is an act concerning the disqualification of persons from being directors or otherwise concerned with a company’s affairs.
Company Voluntary Arrangement (CVA)
A company voluntary arrangement is a voluntary arrangement for a company is a procedure whereby a plan of reorganisation or composition in satisfaction of its debts is put forward to creditors and shareholders. There is limited involvement by the court and the scheme is under the control of a supervisor.
Composition
A compositions is an agreement between a debtor and his creditors whereby the compounding creditors agree with the debtor and between themselves to accept from the debtor payment of less than the amounts due to them in full satisfaction of their claim.
Compulsory Liquidation
A compulsory liquidation of a company is a liquidation ordered by the
court. This is usually as a result of a petition presented to the court by
a creditor and is the only method by which a creditor can bring about a
liquidation of its debtor company.
Connected Persons
Connected persons are directors or shadow directors and their associates, and associates of a company.
Cork Report
The Cork Report is a of the Insolvency Law Review Committee, chaired by Sir Kenneth Cork, upon which the Insolvency Act 1986 is substantially based (Command Paper 8555, 1982).
Court-appointed Receiver
A court-appointed receiver is a person, not necessarily a licensed insolvency practitioner, appointed to take charge of assets usually where they are subject to some legal dispute. Not strictly an insolvency process, the procedure may be used other than for a limited company, eg to settle a partnership dispute.
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Creditors’ Committee
A creditors’ committee is a committee formed to represent the interests of all creditors in administrations, administrative receiverships and bankruptcies. The exact functions of the Committee depend on the type of procedure (cf Liquidation Committee).
Creditors’ Voluntary Liquidation (CVL)
A creditors’ voluntary liquidation relates to an insolvent company. It is commenced by resolution of the shareholders, but is under the effective control of creditors, who can choose the liquidator.
Debenture
A debenture, broadly speaking, a document which either acknowledges or creates a debt. The expression is commonly used to denote a document conferring a fixed and floating charge over all the assets and undertakings of a company.
Deed of Arrangement
A deed of arrangement is a method for an individual (not a company) to come to terms with creditors outside formal bankruptcy. The procedure is governed by the Deeds of Arrangement Act 1914 and is now almost completely replaced by voluntary arrangements.
Disqualification of Directors
A director found to have conducted the affairs of an insolvent company in an ‘unfit’ manner will be disqualified, on application to the court by the DTI, from holding any management position in a company for between two and 15 years.
Extortionate Credit Transaction
An extortionate credit transaction is a transaction by which credit is provided on terms that are exorbitant or grossly unfair compared with the risk accepted by the creditor. Such a transaction may be challenged by an administrator, a liquidator or a trustee in bankruptcy.
Financial Services Compensation Scheme
The Financial Services Compensation Scheme was established under the Financial Services and Markets Act 2000 to provide compensation for certain claims in the event of the default of a regulated financial services business. From 1 December 2001 it replaced the previous compensation schemes for investment business, banking, building societies and insurance. The maximum levels of compensation are:
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Deposits – 100% of the first £50,000.
Investments – 100% of the first £30,000, 90% of the next £20,000.
Insurance – 100% of the first £2,000, 90% of the remainder of claim or value. Claims under certain policies of the compulsory insurance are paid in full.
Fixed Charge
A fixed charge is a form of security granted over specific assets, preventing the debtor from dealing with those assets without the consent of the secured creditor. It gives the secured creditor a first claim on the proceeds of sale, and the creditor can usually appoint a receiver to realise the assets in the event of default.
Floating Charge
A floating charge is a form of security granted to a creditor over general assets of a company which may change from time to time in the normal course of business (eg stock). The company can continue to use the assets in its business until an event of default occurs and the charge crystallises. If this happens, the secured creditor can realise the assets to recover his debt, usually by appointing an administrative receiver, and obtain the net proceeds of sale subject to the prior claims of the preferential creditors.
Fraudulent Trading
Fraudulent trading involves a company which has carried on business with intent to defraud creditors, or for any fraudulent purpose. It is a criminal offence and those involved can be made personally liable for the company’s liabilities.
Going Concern
A going concern is the basis on which licensed insolvency practitioners prefer to sell a business. Effectively it means the business continues, jobs are saved, and a higher price is obtained.
Guarantee
A guarantee is a legal commitment to repay a debt if the original borrower fails to do so. Directors may give guarantees to banks in return for the bank giving finance to their companies.
Individual Voluntary Arrangement (IVA)
A voluntary arrangement for an individual is a procedure whereby a scheme of arrangement of his affairs or composition in satisfaction of his debts is put
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forward to creditors. Such a scheme requires the approval of the court and is under the control of a supervisor.
Insolvency
Insolvency is defined as having insufficient assets to meet all debts, or being unable to pay debts as and when they are due. If a creditor can establish either test, he will be able to present a winding-up petition. For a bankruptcy petition, inability to pay is the only available ground.

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