What is Company Insolvency
Under the Insolvency law, a company is considered insolvent when it is unable to pay its debts. The company liquidation or corporate insolvency is dealt with under the Insolvency Act 1986. Corporate insolvency aims to protect creditors of the company, balance the interests of warring groups of creditors; encourage rescues, and control or punish the unscrupulous directors of the company.
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What is on this page?
- What is Company Insolvency
- Grounds of Insolvency
- Voluntary liquidation
- Duties of Directors
- Powers and Duties of the Liquidator
Grounds of Insolvency
In Company Insolvency, A company is considered to be insolvent when it is unable to pay its debts however, this question is of degree and facts. The threshold or the trigger events, when a company is deemed insolvent, are following;
- When a creditor, who is owed more than £750 by the company, has served a formal written demand notice on the company, waited three weeks and the debt is not settled or come to some payment arrangement with the company; or
- A creditor has obtained judgment including a default judgment against the company and attempted to execute the judgment by sending bailiffs to recover assets or cash from the company, and the debt is still unsatisfied in full or in part; or
- The company is facing a cash flow problem and it can be proved to the court that the company cannot pay its debts as they fall due; or
- The company holds more liabilities than the assets, which means that even by selling all the assets the company will be unable to clear its liabilities or debts.
Under the Business law, A Company can be closed through the following arrangement.
Liquidation, generally known as ‘winding up of the company.’ Liquidation is the most common form of insolvency procedure and marks the end of the road for a company. At the end of the company liquidation process, the company will cease to exist.
Process of Company Liquidation
The starting point for company liquidation is to start the legal proceedings, general it is the unpaid creditors who initiate the proceedings, as a result, a liquidator is appointed who collects the company’s all tangible and non-tangible assets, distributes these assets in the statutory order to the creditors, and at the end of this process, the company is fully dissolved.
Liquidation of company could be of three types
(a) Compulsory liquidation
(b) Creditors’ voluntary liquidation (CVL)
(c) Members’ voluntary liquidation (MVL)
Compulsory liquidation is normally a result of a hostile process initiated against the insolvent company by a third party by filing a winding-up petition in the court and proving that the company is unable to pay its debts in line with the grounds of insolvency as stated above.
Voluntary Liquidation as the name suggests is initiated by the directors of the company voluntarily. Voluntary liquidation includes the following types of liquidation,
- Creditors’ Voluntary Liquidation; and
- Members’ Voluntary Liquidation
It is worth noting that in both creditors’ and Members’ Voluntary liquidation the process is kick-started by the directors hence it is named as voluntary liquidation but in reality only the Members Voluntary Liquidation is truly voluntary, as in this instance the company needs to be solvent and it is the directors who control the process from start to finish.
In Creditors’ Voluntary Liquidation there is no prerequisite that the company needs to be solvent. The company liquidation process is overseen or taken over by the creditors instead of directors even though it is the directors who always initiate the Creditors’ Voluntary Liquidation due to the pressure exerted by the creditors or on professional advice to the directors that the company is insolvent.
In practice, the directors are mostly unwilling to put the company into liquidation, as they always believe that better times are just around the corner. However, the threat of potential lawsuits against them for fraudulent and wrongful trading usually forces them to initiate the company liquidation process. There
Duties of Directors
For a Members’ Voluntary Liquidation, the directors have to swear a statutory declaration that the company is solvent, and they must take appropriate legal advice before doing so. They are liable to a fine, or even imprisonment, for making the declaration of solvency without reasonable ground. If the company is not solvent, then the directors should initiate Creditor Voluntary Insolvency should.
Powers and Duties of the Liquidator
The powers and duties of the liquidator are as follows
- Collect and distribute all assets under the statutory order
- Sell assets
- Use the company bank account to make necessary payments
- Appoint agents; where appropriate
- Litigate on the company’s behalf and defend litigation on the company’s behalf
- Carry on the company business
- Do all of the things necessary to facilitate winding
- Investigate past transactions of the company
- Investigate the conduct of the directors
The administration is an alternative to the Liquidation. The administration is aimed to rescue the flailing organization instead of winding it up. The company liquidation process allows the independent administrator
to run, reorganise and possibly sell the company as a viable and sustainable business and going concern. The Administrator by law has the advantage of a moratorium which stops creditors from taking any legal action and allows the rerun the company’s affairs without any interference from the creditors. Where the administrators fail to revive or sell the company then the only option available is to wind up the company.
Receivership like the administration is also an option to avoid liquidation. However, the receivership is only available to secured creditors to recover what is owed solely to them.
Secured Creditors are those who lend to companies against security given to them by the company Such creditors may be able to appoint a receiver. There has to be a loan involved for receivership to be a relevant course of action, and a receiver is usually appointed when the company is not complying with the terms of the agreement.
Technically speaking, receivership is not really an insolvency procedure, as a receiver may be appointed by the secured creditors whenever the agreement allows it to or whenever there is a breach of the said agreement. The company does not need to be insolvent, although generally, this will be the case. The task of the receiver is to take possession of the security (charged property) and deal with it for the benefit of the secured creditor only which will usually mean selling it. After this has been done, the receiver has no further interest in the company.