The language of insolvency: why getting it wrong can harm struggling firms
Retrieved on:
Tuesday, April 23, 2024
But since the 1980s, the UK has made it a priority to throw a lifeline to struggling companies.
Key Points:
- But since the 1980s, the UK has made it a priority to throw a lifeline to struggling companies.
- It appears, however, that these efforts to enhance the law are being hampered by sloppy language in the media, increasing the stigma around insolvency and potentially deterring businesses from seeking help.
- So what is the correct language to use when we’re discussing insolvency?
Corporate insolvency law
- They are found in the Insolvency Act 1986 (liquidation, administration, company voluntary arrangements (CVAs) and standalone moratoriums) and in the Companies Act 2006 (schemes of arrangement and restructuring plans).
- The liquidator then distributes the value of the assets among the creditors of the company in a ranked order, known as the “insolvency waterfall”.
- It is a voluntary arrangement between the company and its creditors, supervised and approved by an insolvency practitioner (that is, someone who is licensed to act on behalf of an insolvent company).
- For example, after calling in administrators earlier this year, The Body Shop is now thought to be seeking a CVA.
- Directors are given 20 business days to assess their rescue and recovery options.
- The scheme of arrangement, regulated by the Companies Act 2006, is a procedure available to companies that are not yet insolvent.
- Think of it as something akin to an individual consolidating their credit cards, or arranging a plan to repay arrears.
The reality of corporate insolvency
- Clearly, the legislative priority in the UK over the past 40 years has been to promote corporate rescue and renewal.
- This should, in principle, be particularly useful to British businesses at a time when the UK has seen a record number of business failures, with no fewer than 26,595 corporate insolvencies in 2023.
- That figure is 14% higher than in 2022 and 43% higher than pre-pandemic levels in 2019.
- With an increasing number of companies in financial difficulty, we might have expected that corporate rescue cases would have risen too.
The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.