Statement of Affairs: Its Role In Insolvency Proceedings
A company’s Statement of Affairs is a detailed overview of its financial position, required for several different types of formal insolvency proceedings immediately prior to the process.
But the reasons for preparing this document – and what happens afterwards – differ slightly depending on which insolvency procedure the company enters into.
In all circumstances, for the best outcome, company directors should formally instruct a licensed and experienced insolvency practitioner to start and oversee the process.
Then, with the insolvency practitioner and accountant’s assistance, the directors will prepare the Statement of Affairs.
What is a Statement of Affairs?
In short, this is a document that contains details of:
- Company’s financial position
- Estimates for the realisable value of the company’s assets
- The amount it owes to creditors
In other words, it provides a run-through of the struggling company’s finances, to give its creditors a view of how much money could be available, ahead of any creditor vote. It can also be useful information for shareholders and potential buyers.
Here is a more detailed breakdown of what you could expect to see in a Statement of Affairs’ contents, but the specifics can vary depending on each company’s particular situation:
- Assets: All assets both tangible – e.g. property, vehicles, equipment, stock – and intangible – e.g. intellectual property.
- Asset realisation: Analysis on sale value projections for these assets and any pending transactions details.
- Securities: Fixed or floating charges for company assets and who holds them.
- Book debts: Payments that customers owe to the company.
- Liabilities: All current company debts including outstanding loans, unpaid tax bills and other financial obligations.
- Contingent liabilities: Liabilities that could materialise in the future depending on forthcoming potential events e.g. legal claim costs.
- Bank accounts: Company bank account balances.
- Income and expenditure: Cash flow and financial performance figures prior to the insolvency.
- Balance sheet: A balance sheet for the company and any management accounts.
- Employee list: Including names, addresses, salaries and start dates.
- Creditor summary: Company creditor details including names, addresses and money owed.
Here is a government-provided template for a winding-up Statement of Affairs, as an example. Directors should also prepare a report detailing the company’s trading history, financial affairs and events leading to insolvency.
You can also use a Statement of Affairs as part of your request for a Time To Pay arrangement with HMRC. It serves as evidence backing up your claim that the company can repay its debts but just needs more time.
What happens next?
The aftermath of finalising a Statement of Affairs depends on which type of formal insolvency procedure the company is going through.
- Administration: Administrators need the Statement of Affairs within 14 days of a company entering administration. They will send it to creditors so they can make an informed decision when voting. Administrators try to save a company if possible e.g. by restructuring, selling part of it, or another solution, depending on the circumstances.
- Company Voluntary Arrangement (CVA): Creditors use the Statement of Affairs to get a clearer picture of the company’s finances. They’ll use this information to help inform how they vote, regarding whether to accept the Company Voluntary Arrangement proposals. Company Voluntary Arrangements typically last for up to 5 years but a successful agreement can save a struggling company by avoiding liquidation.
- Creditors’ Voluntary Liquidation (CVL): Directors must put together the Statement of Affairs, providing shareholders with a chance to pass a resolution putting the company into liquidation. They inform shareholders either by correspondence or a meeting, giving them 14 days’ clear notice, unless the company articles say otherwise. Then if 75% of shareholders agree to the winding-up resolution, they place the company into a liquidation process with immediate effect. After the CVL, the company stops trading, but it can relieve intense creditor pressure.
- Compulsory liquidation: If the company cannot stop a winding-up petition, or is entering a compulsory liquidation, then the Statement of Affairs is also required. The official receiver or Insolvency Practitioner prepares it.
A compulsory liquidation is the least favourable option and will close down the company.
Insolvency Practitioners and the Statement of Affairs
A licensed Insolvency Practitioner dealing with the case collects the relevant information for a Statement of Affairs with the help of the accountant and company directors.
Then the Insolvency Practitioner checks all of the information thoroughly. Inaccuracies or missing information can have serious consequences.
Once they have prepared the Statement of Affairs, the Insolvency Practitioner sends it to creditors and shareholders of the company, also registering it with Companies House for public viewing.
In other words, if you need to prepare this document, it’s crucial to put it together with the help of an experienced, licensed Insolvency Practitioner.
This ensures your business has an accurate Statement of Affairs, putting company directors in the best position possible for the next steps in the insolvency procedure.
Where there have been other insolvency proceedings before a winding-up order, the Insolvency Practitioner or official receiver may decide that the last Statement of Affairs has enough information.
When deciding if they need a new Statement of Affairs, they take into account the length of time since the previous insolvency proceedings commenced.
For more information about the Statement of Affairs or any of our services, please don’t hesitate to get in touch.
