If you are company is struggling to trade and pay its debts when they become due, and you discover that your assets are worth less than your debts, then your company is insolvent. If this is the case, unless you can come to an arrangement with your creditors then the company may need to go into liquidation. This is where the assets of a company are sold off to try and pay off creditors.
There are three main sorts of liquidation:
For many company directors, liquidation can be beneficial, allowing them to escape from a troubled company debt-free (apart from loans you have personally guaranteed) and either start another business or even buy back the assets of the liquidated company and carry on with a clean slate. Liquidation is probably your best option if:
If you want to save the company in its present form, you still have money coming in and you predict that matters will improve in the future it might be best to put formal procedures on hold and get in touch with your creditors to try to negotiate some sort of alternative repayment scheme, giving you more time to pay up. It’s a good idea to include a timetable of when payments will be made.
Similar in some ways to an informal arrangement, a company voluntary agreement involves bringing in the services of a registered Insolvency Practitioner (IP) - who specialises in advising failing companies – to negotiate with the creditors and hammer out an agreement on how you will repay your debts. The IP will call a creditors’ meeting to present your repayment plan and if 75% of creditor (by value) s vote for the arrangement, it is binding on all parties. Once agreement is reached, it is formalised by the court.
Administration is a procedure which allows a company to ask the court for a certain amount of time during which creditors are barred from taking action against it to recover their cash. During this period, the company will be administered by an IP whose priority will be to rescue the company if possible. If this isn’t feasible, the IP must try and get as good a deal for the creditors as possible, which may entail selling off the business, or its assets, to pay off the company’s debts.
A secured creditor can ask that an administrative receiver be appointed to recover the money owed to them by a limited company. The administrative receiver – who is an Insolvency Practitioner – takes control of the business and may sell the assets off, or sell the whole business as a going concern to pay off the secured creditor and cover the costs of the receivership.
If you are a director and you know your company has big financial problems you need to make an early decision about whether to continue trading. If you do carry on, even though you knew the company had no realistic chance of avoiding liquidation, you can be found personally liable for wrongful trading (trading while the company is insolvent), if the company goes into liquidation. You can also be held personally liable for any personal guarantees made and criminally and personally liable for fraudulent trading, (deceiving creditors), if the company goes into liquidation.
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