Voluntarily entering an insolvent liquidation can feel like an admission of defeat, a sign that you have failed in your duties as a director and are incapable of running a business. Quite the opposite is true. Directors should be aware of their company’s solvent status, and if the company’s debts are of such a level that trading on will worsen the situation, then voluntarily putting the company into liquidation might be the best course of action, minimising the negative effects.
So, as a company’s director, what can you expect when entering an insolvent liquidation?
Recognising The Signs Of Insolvency
As a director, you should always know whether the company is solvent or insolvent. Knowing this and recognising the signs indicating possible insolvency can help you take the necessary action to alleviate the issues before they become unmanageable.
Signs that your company could be insolvent include, but are not limited to:
• Cash Flow Issues - If the company is struggling to repay its bills as and when they fall due, it could indicate problems with its cash flow and potential insolvency.
• An Imbalanced Balance Sheet - The company’s balance sheet lists both its liabilities and assets. The former should not outweigh the latter. If it does, this could indicate that the company is insolvent and owes more to its creditors than it has in value.
• Legal Action - If your company doesn’t repay creditors on time, they can initiate legal action to recover their owed monies. Repayment reminders can escalate into more formal action, including Statutory Demands, County Court Judgments (CCJs), and, in the worst case, a winding-up petition. Failing to repay or dispute these can lead to severe consequences for the company.
Considering Your Options
If the company finds itself in one of the situations listed above, as its director, you should act as soon as you become aware that the company could be insolvent. If you act early enough, you will likely have more options to deal with the issues than if you bury your head in the sand or kick the can down the road.
Your company’s circumstances and what future you want for it will dictate which options are available. These financial and legal options could include the following:
- Repaying In Instalments Via A Formal Company Voluntary Arrangement (CVA)
A CVA allows an insolvent company to repay an affordable portion of its debt on a monthly basis. The process allows directors to retain control of the company while it continues trading, maintaining the brand while repaying what it can afford. It can be useful if the company is struggling with debts to unsecured creditors or if brand reputation is of importance.
- Restructuring Through Administration
Administration can be helpful if the company is struggling with severe creditor pressure and would benefit from a “buffer”. During this time, a licensed insolvency practitioner investigates the company’s internal structure and formulates a route forward.
If, however, the company’s debts are so severe that it doesn’t have a feasible future or creditor pressure is of such a level that the company can’t realistically continue trading, it may be better to voluntarily close the company down through a Creditors Voluntary Liquidation (CVL).
A CVL allows a company to close in an orderly manner, quickly removing creditor pressure and putting a stop to any further legal action.
As a CVL is a formal, legally binding process, it can only be actioned and overseen by a licensed insolvency practitioner (IP). They can discuss your company’s specific circumstances and give you an idea of a liquidation’s potential costs.
The Liquidation Process
Once you’re aware your company is insolvent, you should contact a licensed and regulated IP, who can advise you of the best route forward. If they decide a CVL is the best choice for the company, they will take steps to start the process. As part of this process, the IP will likely ask for details of the company’s creditors. These can include:
• Banks.
• Trade creditors.
• Financiers.
• Employees.
The IP will use this information to send out invitations for the creditors’ meeting. They are also likely to ask directors to compile a report and statement of affairs. The information required may vary but will likely include details of the company’s assets and their value. The company’s trading history may also be required, detailing why it has become insolvent.
If the creditors and shareholders approve the proposed liquidation, the IP becomes the liquidator, and they can start undertaking their duties to liquidate the company.
Depending on the company’s circumstances, the liquidator’s duties may include:
- Realising company assets.
- Dealing with employees’ claims.
- Investigating the company’s and directors’ affairs and sending The Insolvency Service a conduct report.
- Communicating with the company’s creditors throughout the process.
- Creating an agreement of claims for the distribution of any funds to creditors.
After Liquidation
Once the liquidation is complete, the insolvent company ceases to exist, and its debts die with it. As a limited company provides its directors with limited liability protection, it is unlikely that directors will be held personally liable for the company’s debts unless they have either agreed to personal guarantees, they have an outstanding director’s loan account, or they have committed wrongful trading.
If they have fulfilled their directorial duties leading up to and during the insolvent period, and there are no grounds for disqualification, directors can often set up a new limited company once the liquidation concludes. However, there can be restrictions and limitations around using the old company’s assets, including a similar name.
