CORPORATE INSOLVENCY LAW

Corporate Insolvency Law

Corporate Insolvency Law

Firstly, we will look at what is liquidation. 'Liquidation is the end of the road for the troubled company. It involves its winding up and the gathering in of the assets for subsequent distribution to creditors. An insolvent company may be wound up in two ways; a creditor forcing its liquidation by court order (compulsory liquidation), or the members of the company will decide to enter liquidation 'under the watchful eyes of the creditors' (creditors' voluntary winding up). The appointed liquidator realises the property and distributes the proceeds rateably and equally (Pari Passu Principle) among all creditors which are owed money. This in effect, as stated above, means the death of the company. To continue, we will proceed to the options that insolvent company (Photo-D-Lux Limited) have in an attempt to avoid the 'death' of the company; options which may prove to be beneficial for both the company and its creditors.



Options for Insolvents (Other Than Liquidation)-Re-Financing

Furthermore, an attempt of re-financing the company is an option that can be followed. Where a company is under pressure or has encountered a major recession then the directors must take into consideration the various re-financing options and decide whether they can constitute the solution to their difficulties.

However, difficulties arise with this option as the question of 'would anyone lend to a troubled company?' arises. The company under pressure must provide some type of advantage to any potential lenders such as debt subordination that means that the lenders will be paid first, over the rest of the creditors, once the company is in good financial health.

As stated above there are various re-financing options for which an exhaustive list cannot be given. One of the most common methods is asset re-financing. As regards assets re-financing, most companies devalue their assets more rapidly than the worth of those assets drops. 'Therefore, there are "unencumbered" assets to lend against and the assets of the company form collateral for the lender to secure themselves against.' A company faced with a short-term crisis can use this method to deal with the problem by using its assets to raise cash in a very efficient manner. However, if the crisis is longer term the company may not be able to service the debt repayments.

Photo-D-Lux Limited may use one of the many re-financing options in an attempt to avoid insolvency that may lead to liquidation. Although, all of these options have their disadvantages, they may raise capital as seen above and could possibly rehabilitate a troubled company.



Receivership

To continue, we are going to look at the procedure of receivership. Receivership 'is where a secured creditor of a company enforces the security it has been granted by the company, by appointing a receiver.' This procedure often gave control of insolvency proceedings and the appointor of a receiver role to banks. The most common form of security is the charge and the receiver is appointed in order to realise the charged ...