Can A Company Continue Trading If It Is Insolvent?

Directors must acknowledge their responsibility and take positive action when there are doubts as to the solvency of the company.

If a director fails to prevent the company from incurring debts and liabilities at a time when the company is insolvent, the director can become personally liable for the debts incurred.

  What Is Liquidation?

A company is a legal entity just like you and I are, so it is a different legal person from it directors and shareholders. It is very common for most people to think that the directors are the company or the share holders are the company. If you own shares in IBM that does not mean you are IBM. Same if the people who run IBM the directors do not own the company, the directors are officers of the company. A company is a legal body. A company "dies" when it is dissolved and is no longer on the register of companies. The most important method of dissolving a company is through liquidation. Liquidation is final and the company will not be in existence after the liquidation comes to an end.

How Do Liquidations Work?

First of all you need to understand the separate types of liquidation available

  1. Members/Shareholders Voluntary Liquidation
  2. Creditors Voluntary Liquidation
  3. Compulsory Liquidation

The shareholders voluntary liquidation is where a company goes into liquidation when it knows it can not continue to trade or it has no further business to attend. This is normally at the instructions of the shareholder and or directors of the company. An insolvency practitioner is appointed by the members to liquidate the company’s assets and pay any liabilities out of the processed.

The creditors voluntary liquidation is where a company is insolvent i.e. it cannot pay its debts as and when they fall due and is forced into liquidation. An insolvency practitioner is appointed liquidator by the members/creditors.

A Compulsory Liquidation is where a company is forced into liquidation by one or more of its creditors (for none payment of debts) or the Secretary of State appoints a liquidator over the affairs of the company.

How Are The Different Types Of Liquidation Used? 

The member/shareholders liquidation is used generally to re-structure assets, group of companies, or to release capital. International Corporations have thousands of companies that have been registered to deal with certain business. If that part of their business has been re-organised the company that owned it has to go. A members liquidation is the normal way of restructuring companies, assets and so on….

The creditors liquidation (where a company is insolvent) is generally forced upon the company as it can not continue to trade either because the directors believe that they cannot continue or a receiver was appointed over the assets of the company or a creditor sued the company for his/her money.

What Happens In A  Liquidation?

When a company is in liquidation a liquidator is appointed to run the affairs of the company in order to close it down. The appointment of the liquidator has the effect of removing the directors from office and the liquidator is the authorised person who can deal with any assets, liabilities, bank account and employees of the company. Once the appointment of the liquidator is made the directors cannot run the company. The only person who can is the liquidator and the persons specifically authorised by him can mange the affairs of the company.

What If I Don’t Liquidate My Company?

You as a director can be held liable for any debts your company incurs once the company becomes insolvent. If you know or believe that your company is not going to able to meets its debts and you continue to trade, it is very important that you seek legal advice immediately before you continue any further. You can phone our FREE directors confidential helpline on 0845 430 7676. Don’t let your business disaster become your personal disaster! Don’t delay act now.

What Is A liquidator?

The Insolvency Act 1986 specifies that a person in order to be a liquidator has to be authorised by the Department of Trade and Industry (DTI). These people are know as Insolvency Practitioners they normally come from a professional background such as accountancy or legal.

The liquidator must have suitable indemnity (insurance cover) and must follow ethical, technical and other recommendations adopted by his Professional Body, or by the DTI. There are currently about 2000 Insolvency Professionals who can be appointed as liquidators.

How Does A Liquidator Get Appointed?

The liquidator is appointed by the following persons.

  • Member/shareholders of the company
  • Creditors of the company
  • The Secretary of State

If in the event it was a forced liquidation via the courts and the official receivers office appoints a liquidator the creditors can appoint another liquidator of their chose.

Who Can Put The Company In To Liquidation?

A company can go into liquidation by the members of the company, the creditors of the company, or by the BERR (Government Body) formally known as the DTI.

With the introduction of the 1986 Insolvency Act one of the most popular method of liquidation is the voluntary liquidation either member or creditors.

How Does A Members Voluntary Liquidation Work?

A members voluntary liquidation means that the shareholders would get their capital or the assets that the company owns will be disposed. This has taxation implications.(Income Tax and Capital Gains Tax) Professional advice is therefore required from your accountant regarding the tax position of the company and the tax position of the individual shareholders.

How Does A Compulsory Liquidation Work?

Where a creditor proceeds against a company to realise his debt and the company is unable to pay its debt the company is placed in to liquidation by the court. The creditor must be owed more than £750 and he must have given 21 days notice to the company via a statutory demand.

If the company is liquidated by the court the liquidator is the Official Receiver a government employee. If the company has assets the Official receiver calls for a creditors meeting at which meeting an Insolvency Practitioner is appointed liquidator, to realise the assets and then distribute the proceeds to the creditors.

What Is A Creditors Voluntary Liquidation?

A creditors voluntary liquidation is a liquidation where the company is insolvent i.e. it is unable pay its creditors.

The directors pass a resolution that the company can not continue to trade and call for a members and creditors meetings to be held. The meetings decide upon the liquidator, liquidation committee and other relevant matters specific to the company, and the company entered into liquidation.

The documents required to be produced at the members and creditors meetings are the Statement of Affairs (detailing assets and liabilities of the company), A deficiency account, Statutory information, and history of the company with an explanation of the deficiency and the reasons for failure. The creditors can request further explanations if they so wish.

In most cases the directors are assisted by an Insolvency Practitioner in preparing the above statements and generally organises the meeting, letters, notices, advertising, etc.

What Is A Creditors Meeting And What Happens?

At the creditors meeting the statement of affairs, history and explanations are produced at the meeting, and explanations are given on specific matters.

It is customary for the chairman (company director/s) of the meeting to answer questions from the creditors present regarding the affairs of the company. The formal part of the meeting is to appoint an Insolvency Professional as liquidator of the company and the appointment of a liquidation committee. This is done by voting by value of debt. Persons that have security and wish to vote at the meeting they must either relinquish their security or value their security and vote only for the unsecured part.

What’s A Liquidation Committee?

The liquidation committee is a Committee of creditors with a minimum number of 3 and a maximum of 5 who receive information from the liquidator and sanction his actions.

What Are The Duties Of The Liquidator?

The main duty of the liquidator is to realise the assets of the company and pay its creditors a dividend if funds are available.

Another important aspect of the liquidation work is to investigate the company’s affairs and recover any assets that are missing, or have been transferred at undervalue out of the company. These transactions can be reversed by the liquidator.

He must also report on the directors conduct to the BERR (Government Body) Business Enterprise & Recovery Reform.

For More Information And Advice Call 0800 24 0800

Filed under: Insolvency

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