Each week we are seeing stories in the news about construction companies becoming "insolvent", going into "liquidation" or having "administrators" appointed. But what do these terms mean? Insolvency is a complex area of law with its own terminology, so we've broken down what all the terms mean below.
What is insolvency and what happens to a company when it is insolvent?
The main piece of legislation that governs insolvency in the UK – the Insolvency Act 1986 – does not actually define insolvency. From a legal perspective, companies are legal persons. They're effectively born (when they're "incorporated") and they also cease to exist (when they're "dissolved"). Somewhere in this legal life, they may experience financial distress and become unable to pay their debts. This, in a nutshell, is the concept of insolvency from a corporate perspective: an ability to pay one's debts, it's essentially a state of being.
When a company is unable to pay its debts, it is very likely that it will enter a form of insolvency procedure under the Insolvency Act. For construction companies, the main procedures here could include administration, creditors’ voluntary liquidation and compulsory liquidation.
What does it mean when a company goes into administration?
Many construction companies that are insolvent go into administration. In short, administration is a procedure where a company may be reorganised or its assets realised without fear of those who are owed money by the company ("creditors") taking action against it (known as a "statutory moratorium").
An administrator is appointed over the company, who takes control of the company's business and assets from its directors, and whose job it is to implement the strategy for the company's rescue or asset realisation. At the end of the administration, the business may have survived and the company been rescued, or the business and the company's assets may have been sold by the administrator. The administration ends with the company either being dissolved or the company going into liquidation.
There are various ways in which a company may be put into administration: by the court or by an out-of-court procedure available to the company itself, its directors, or a holder of a qualified floating charge (a person who has a security over the company's assets).
What does it mean if a company places itself into creditors' voluntary liquidation (aka "CVL")?
CVL is a procedure that an insolvency company places itself into voluntarily on the recommendation of its directors and the agreement of its shareholders (hence the 'V').
A liquidator is appointed, who the company's creditors have the opportunity to choose (hence the 'C' and the 'L'), whose job it is to collect in and sell the company's assets and distribute the proceeds to the company's creditors. At the end of liquidation the company is dissolved. Liquidation is therefore also referred to as 'winding up' or the company being 'wound up'.
What is compulsory liquidation?
This is the other form of insolvent liquidation, this time instigated by a "winding up petition" (typically presented and forced upon the company by one of its creditors) and resulting in a "winding up order" being made against the company by the court (hence the 'compulsory').
When a winding up order is made, the Official Receiver is appointed as liquidator (effectively a 'state liquidator'), who again collects in and realises the company's assets and shares out any proceeds with the company's creditors.
In both forms of insolvent liquidation (CVL and compulsory) the powers of the company's directors automatically cease (and in the case of compulsory liquidation, they're also automatically dismissed from office). The liquidator's powers in both cases also include continuing or bringing legal proceedings in the name of the company.
The Insolvency Services' quarterly statistics show that, of the 1,049 total company insolvencies within the construction sector during Q1 2023, 94.6% were liquidations as opposed to companies going into administration.