There are several approaches that the directors of a company that is in financial difficulty can take to try and save the business. These include administrations and voluntary arrangements.
In some cases a business cannot be saved and the company must be closed down in an orderly fashion. In all cases, directors must have regard to their responsibilities under the Insolvency Act 1986 to ensure, for example, that they do not fall foul of the wrongful trading provisions of the Act, make an illegal payment of money or transfer assets contrary to the Act.
Directors must take the necessary steps to protect the company’s assets, safeguard the interests of creditors and not worsen the financial position of the company to the possible detriment of creditors.
Directors of insolvent companies must therefore take professional advice from a Licensed Insolvency Practitioner as soon as possible. At Gore and Company, this initial advice is free and is designed to enable directors to make an informed choice as between the options that are available to them.
There are three types of liquidation procedure and each may be appropriate under different circumstances.
Put simply, the directors agree that the company is insolvent and should be wound up. They then follow a process which involves holding meetings of shareholders and creditors and which results in a Licensed Insolvency Practitioner being appointed liquidator of the company.
In general, there is no involvement from the court in the process of placing the company into liquidation.
b. Compulsory Liquidation
In this case the directors of an insolvent company, its creditors and others may apply to the Court for an order that the company be wound up. Once the Court makes the winding up order the Official Receiver, who is a civil servant working for the Government’s Insolvency Service, is appointed liquidator.
c. Members’ Voluntary Liquidation
If the company is solvent and the shareholders/directors wish to wind up the company because, for example, they no longer wish to continue to trade or they wish to extract the business assets, the shareholders pass a resolution to place the company into liquidation and they appoint their own liquidator.
In the first two cases, a company must be insolvent in that it either:
- Cannot meet its debts as and when they fall due OR
- It’s liabilities are greater than its assets
A member’s voluntary liquidation is appropriate where the company is solvent and can meet all of its debts.