Every company intends to be financially successful, however, there are times when a company experiences financial distress. This can include being unable to make repayments on debts or where the value of the company is lower than the financial liabilities the company has. This is referred to as corporate insolvency. To find out more, we have compiled the answers to the most commonly asked questions about corporate insolvency below.
Are There Any Signs That a Company is, or May Become, Insolvent?
Becoming insolvent means that a company is struggling financially and is unable to, or finding it difficult to, pay its debts. There are a number of signs that a company may be insolvent or that insolvency may occur in the near future. These include:
- A company not paying bills on time.
- A company selling assets to raise cash.
- A company experiencing a reduction in cash flow.
- A company applying for more credit.
- A company’s director(s) resigning.
Are There Different Types of Corporate Insolvency?
Yes, there are three main types of corporate insolvency, depending on the financial situation of the company.
- Administration – This is implemented in situations where a company is struggling financially and is unable to pay its debts, but there is still a chance that the financial issues could be resolved. This formal insolvency process involves appointing an administrator who takes control of the company and is responsible for implementing ways of repaying the company’s debts. It is possible for a company to come out of administration and continue trading.
- Voluntary Liquidation – In situations where a company’s director(s) no longer believe the company to be viable, they may choose to wind up the company. This is a voluntary process instigated by the directors.
- Compulsory Liquidation – This is where a creditor of the company formally petitions the court to wind up the company due to non-payment and/or non-negotiation of a repayment agreement. The company director(s) do not have to be in agreement as the court will make the decision.
How Serious is a Statutory Demand?
A statutory demand is a written warning that is sent to a company from the company’s creditor. The demand will state that the company is required to make repayments on the debt or make contact with the creditor to discuss an acceptable arrangement.
Receiving a statutory demand should not be ignored as the consequences can be very serious. The demand will notify the company that if they fail to pay, or enter into a suitable repayment arrangement, the creditor may commence legal proceedings to put the company into compulsory liquidation.
If a Company is Insolvent, Who is in Control of the Company?
This depends on the type of insolvency, however, the responsibility for decision-making within the company is removed from the company director(s) in all situations. For a company in administration, an Administrator will be appointed and a company in voluntary or compulsory liquidation will have a Liquidator appointed. The role of the Administrator or Liquidator is to take control of the company’s assets and attempt to sell the assets to repay debts.
Is There Any Personal Liability When a Company Is Insolvent?
Usually, there is no personal liability when a company is insolvent. The Administrator or Liquidator will use whatever assets the company has to repay debts to creditors in full. In the case of Administration, the company may retain enough assets to continue trading, however, in cases of Liquidation, the company will cease to trade. In these situations, the creditors may not recover all the monies they are owed.
If the director(s) of a company continue to trade when they knew, or it would be reasonable for them to know, that the company was insolvent, this is considered wrongful trading. If wrongful trading is found, then the director(s) may be held personally liable for the company’s debts.
What Happens to Employees When a Company Is Insolvent?
This is often an area where difficult decisions have to be made. If the company is in Administration, then it is likely that some, if not all, employees will remain with the company. This is because the aim is that the company will continue to trade and so employees will be required.
However, if the company is in Liquidation and ceases to trade, redundancies will be necessary for the company to reduce its cash flow. Employees should seek legal advice to ensure their rights are considered when redundancies are necessary.
How Can Corporate Insolvency be Avoided?
There are many variables that are outside the control of company directors or employees, and these can lead to financial struggles. However, there are also many factors that are within the control of the company and it is important that these are managed effectively.
If possible, a company should have a finance department with suitably qualified staff to carry out careful financial planning. Monitoring cash flow effectively and making prudent decisions is vital and companies should avoid taking out large amounts of debt. Having insurance to mitigate business risks is a possibility and if financial difficulties occur, a company should seek professional, legal advice as early as possible in an attempt to mitigate any detrimental impact and avoid reaching insolvency.
Find Out More From Our Legal Experts
Corporate insolvency is a complex area with laws and regulations that apply in different circumstances. The Insolvency Act 1986 and the Companies Act 2006 should be understood, however, it is always recommended that professional legal advice is obtained.
At Carter Bond Solicitors we are experts in corporate insolvency and provide advice, guidance and representation to companies and individuals. With a wealth of knowledge and experience, we are able to guide you through the process of insolvency and ensure that the law is upheld at all times.
For more information or assistance, you can contact Carter Bond Solicitors at 020 3476 6751 or via email at info@carterbond.co.uk. You can also find valuable resources on their YouTube channel and website at www.carterbond.co.uk.
This note comprises the view of the author at the time of writing. This note is not a substitute for legal advice. Information may be incorrect or out of date and may not constitute a definitive or complete statement of the law or the legal market in any area. This note is not intended to constitute advice in any specific situation. You should take legal advice in specific situations. All implied warranties and conditions are excluded, to the maximum extent permitted by law.
