What are the consequences of a company’s insolvency?

What are the consequences of a company’s insolvency?

Putting a business into an insolvency procedure is not a risk free enterprise and it is important that Directors understand some of the issues that could possibly arise as a result.

All cases are different, so depending on the individual case, some of these may apply:

Personal claims – if directors have given personal guarantees then they could be liable to pay debts attached to these themselves in the case of insolvency.

Directors’ disqualification – The insolvency practitioner appointed will often look into the conduct of individual directors and if this is found to be negligent or dishonest could apply to have them disqualified for a term as a director.

Compulsory liquidation – the first stages of insolvency could end up being merely a precursor to a liquidation of the assets of a firm if the practitioner cannot find a buyer of a way to keep the business trading.

Voiding of disposal of assets –  Once a winding-up petition has been presented it is likely that the disposal of any assets could be voided. If a company wishes to sell goods or make payments for supplies while a winding-up petition is in progress, it must first obtain authorisation from the court

Banking facilities default – Most business loans will have covenants attached. Insolvency and the instigation of a formal insolvency procedure will almost certainly be considered an event of default under these rules and will entitle the lender to take steps to enforce any security it holds. This could mean taking possession of any assets or even the entire company is need be.

Withdrawal of support from suppliers and customers – nothing travels as fast as bad news and insolvency may also be a trigger event, entitling suppliers and customers to take protective measures under contracts with the company. This can include termination of contracts and other enforcement measures. Often terms of sale will include a clause that prevents ownership of goods passing until payment has been made in full so the company could find suppliers at the gate demanding their goods back.

Court ordering transactions to be reviewed and reversed – If an insolvent company is subsequently placed into liquidation or administration, any transactions the company entered into for a period of up to two years before the insolvency procedure began can be reviewed on application by the appointed insolvency practitioner, and reversed if the company was insolvent at the time and the transaction took place for either less than the market value or gave certain creditors priority over others. Fraudulent transactions are also reviewable without time limit.

Once the business goes into administration the control passes away from the Directors and into the hands of the insolvency practitioners appointed.

To avoid any of the above consequences Directors may like to look at other options such as Company Voluntary Arrangements (CVA) or  pre-pack phoenix process to retain control.

In any event it is vital that businesses take qualified and experienced insolvency advice before choosing a course of action to ensure that the safest route is taken.

Leave a Reply

Your email address will not be published. Required fields are marked *