The issue in question is whether JustGym Ltd is insolvent. United Kingdom insolvency law regulates companies in the United Kingdom which cannot repay their debts. JustGym Ltd falls under such companies. The Companies Act of 2006 defines “insolvency” to mean being unable to pay debts. Having established that JustGym Ltd is insolvent, it is also essential to point out that the current policy of United Kingdom insolvency law attempts to rescue companies that are in difficulty, in order to minimize losses and fairly distribute the burden between the creditors, employees and other stakeholders. In the event the company cannot be rescued then it is ‘liquidated’ in order for the assets to be sold off to repay creditors as per their order of priority. Based on the foregoing JustGym Ltd falls under this category because the company is no longer a going concern and it is also challenging to deal with accruing debts.
As per the information provided in the scenario, the following insolvency procedures may be available to JustGym Ltd: – company voluntary arrangement, schemes of arrangement and informal rescue.
First and foremost, Company Voluntary Arrangement is a procedure which entails an agreement or ‘compromise’ between the creditors and a company whose main aim is to avoid terminal insolvency proceedings. In order for Company Voluntary Arrangement to start, the directors of a company are required to prepare a proposal to address the company’s financial difficulties and submit the same along with the statement of affairs to an insolvency practitioner.
The set timeline for a Company Voluntary Agreement is between 1-5 years where the company has been granted the chance to pay a portion of its debts. In addition to that there is a certain threshold that is required from the creditors in order for the proposal to be agreed upon. The said threshold is 75% of all the creditors. The most noticeable advantage of the Company Voluntary Agreement is that the owners and/or directors of the company can still be in control as the company goes about its day to day activities. On the other hand the downside of the Company Voluntary Agreement is that the company’s credit rating will be affected for a period of 6 years.
Secondly the Scheme of Arrangement is basically an arrangement or ‘compromise’ proposed by the company, creditor, member, administrator or liquidator. Schemes of arrangement are normally brought about by insolvent or solvent companies. They are normally between the company and its creditors or members and the main aim of such an arrangement is to ensure the company’s indebtedness in part or whole within a certain timeframe.
Last but not least an informal rescue basically stands in for any non-insolvency arrangement that a company may make with respect to its debts with the creditors. It should be noted that this is not a formal insolvency process hence it is not legally binding on the creditors. Basically the company enters into an internal arrangement with the creditors on how the company will settle the debts and keep on being a going business concern within a certain period. This is the most efficient manner of dealing with a company that faces insolvency in the current system.
Administration is defined as an insolvency process where a company is placed under the control of an insolvency practitioner referred to as the Administrator. Once appointed, the administrator gains massive powers, duties as well as liabilities over the company. It is important for the administrator to understand the magnitude of his or her appointment.
Once the administrator has been appointed, the powers of the director’s and/or owners of the company are suspended and the administrator starts acting as the agent of the company. After taking over, the administrator is required by law to initiate a meeting of all creditors within a period of eight business days. It is in this meeting that the creditors also form a committee that will assist the administrator in dispensing his or her duties.
Another role played by the administrator is to rescue the company. The administrator is mandated to focus on rescuing the company and in the event this is not possible, the administrator will attempt to typically transfer the company as a going concern or in the worst case scenario break up the company and divide the proceeds among the creditors. At all material times the administrator is required to be having the creditors in mind all actions done should be in their favor or benefit.
The most important role that an administrator plays is exercising good business judgment. An administrator is subject to a duty to perform his or her functions as efficiently and quickly as is reasonable possible. In addition to that the administrator must not act in a way that harms the creditors’ interest in an unfair manner.