If you need to consider your Director options when a company is insolvent, Oliver Elliot can help you address your concerns and explore the matter with you.
Oliver Elliot can help you explore your options if you are a Director dealing with an insolvent company.
Overview: Director Options When A Company Is Insolvent
A company is insolvent when it can’t pay its debts. This could mean either:
- it can’t pay bills when they become due
- it has more liabilities than assets on its balance sheet
A company that is insolvent is in danger of being closed down. However, company directors may be able to take action that allows the company to continue trading.
If your company has financial problems, even if you think they might be temporary, you should ensure you understand the options in this guide, and their consequences.
You should also consider getting professional advice from:
- Oliver Elliot
- Citizens Advice Bureau
- qualified accountant
- authorised insolvency practitioner
- reputable financial adviser
- debt advice centre
Ways to deal with your company’s insolvency
‘Insolvency’ describes both the situation an insolvent company is in, and also the various legal procedures for dealing with this situation under the Insolvency Act 1986.
There are 3 options that allow an insolvent company to continue trading. Directors can:
- contact all your creditors to see if you can reach an informal agreement
- enter into a company voluntary arrangement
- put the company into administration, offering some respite from creditor action and enabling:
- the company to continue
- property to be sold
You also have the option of liquidating (‘winding up’) your company. This means the company is closed down and its assets are sold and distributed to its creditors.
Action that can be taken against an insolvent company
Creditors can take action to recover the debt by a creditor seeking to enforce a debt. Once they have done this, you can take certain steps to protect your company from compulsory liquidation (forcing it to close).
If the creditors are unable to recover the debts they are owed through a court judgement or a statutory demand, they can apply to wind the company up (compulsory liquidation).
Alternatively, creditors can seek to put your company into administration.
Options that allow the company to stay open
Informal agreement with creditors
You may have the option of making an informal agreement with your creditors to pay your debt on different terms. This is usually used when you’re experiencing temporary financial difficulties and there is no immediate threat of formal action by any of your creditors.
You should contact your creditors and discuss this option as soon as you are aware of your financial difficulty. Make sure you are aware of any costs involved in changing your repayment terms, including how it will affect your interest payments.
An informal agreement is not legally binding and a creditor can withdraw the agreement at any time.
Company voluntary agreement (CVA)
A CVA is a binding agreement between a financially troubled company and its creditors for payment of all, or part of, the company’s debts over an agreed period.
The company can continue trading during the CVA and afterwards.
A CVA can be proposed by the company’s directors, but not by its shareholders or creditors.
The administration process means you hand over your company to an insolvency practitioner (the ‘administrator’). While the administrator is in charge, your creditors can’t take legal action to recover their debts or start compulsory liquidation without the permission of the court.
The administrator draws up proposals to:
- restore the company’s viability
- come to an arrangement with the creditors (a CVA)
- sell the business as a going concern or realise more from the assets than in a liquidation
- realise assets to pay a preferential or secured creditor
It is up to the creditors whether to agree to the administrator’s proposals. The proposals may achieve a better result for the company’s creditors as a whole than would be achieved in an immediate winding up.
Administration can mean your company doesn’t have to pay all its debts in full. However, your company can still be wound up with the agreement of the court.
Find out about the process of putting a company into administration.
A company in administrative receivership is also said to be “in receivership”.
Receivership is initiated by a holder of a floating charge, usually a bank. The holder appoints an administrative receiver to recover money owed to it. The court is not usually involved.
The administrative receiver (also known as ‘the receiver’) is a private insolvency practitioner. They are not the same as the official receiver.
The receiver’s task is to recover enough money to pay:
- their costs
- the preferential creditors
- the floating charge holder’s debt
An administrative receiver does not make payments to unsecured creditors.
If the floating charge was created after 15 September 2003, the Enterprise Act 2002 allows the holder to appoint an administrative receiver only in connection with floating charges granted in relation to:
- certain transactions in capital markets
- public/private partnerships
- utility projects
- finance projects
- financial markets
- registered social landlords
Closing a company (liquidation or ‘winding up’): Director Options When A Company Is Insolvent
Liquidation legally ends or ‘winds up’ a limited company. It will stop doing business and employing people. It will be removed (‘struck off’) from the register at Companies House, which means it ceases to exist.
Both solvent and insolvent companies can be wound up by their own directors.
For a solvent company whose directors have decided to stop trading it’s members voluntary liquidation.
The process of removing the company from the register is still called ‘striking off’ for all methods of liquidation.
Creditors can also apply to wind an insolvent company up through compulsory liquidation.
Find out how creditors apply for compulsory liquidation.
Liquidation is overseen by a liquidator (either the official receiver or an insolvency practitioner). It involves:
- making sure all company contracts (including employee contracts) are completed, transferred or otherwise ended
- ceasing the company’s business
- settling any legal disputes
- selling any assets
- collecting money owed to the company
- distributing any funds to creditors (eg through a CVA)
- repaying share capital to shareholders
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Disclaimer: Director Options When A Company Is Insolvent
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