When a company goes into liquidation there are lots of rules that need to be followed to ensure that the directors and manager stay within the law and avoid any chance of action being taken against them.
In this post, we’ll look at what happens to overdue debt and what directors need to consider at what is, after all, a difficult time.
The main objective of company liquidation (or any insolvency procedure) is to use the company’s assets to pay off outstanding debts before it is closed down or ‘wound up’. Whether you’re approaching liquidation as a solvent or insolvent company, settling debts with creditors is a primary concern, and any insolvency practitioner or professional whose help you enlist will reinforce this. By law, you must contact an insolvency practitioner to oversee the process and guide you and your company through the required steps.
There are three key reasons that may lead to liquidation, and not all of them are necessarily negative;
- If company shareholders and directors agree that there’s no way for a company to settle its debts and can see the end in sight, they may trigger a process known as Creditors Voluntary Liquidation. The majority of members must pass a resolution agreeing to wind up the company, and under the supervision of an insolvency professional assets are distributed among the company’s creditors.
- If creditors are chasing you for payment and they become frustrated they may begin Compulsory Liquidation. This process involves a ‘wind up order’ being issued from the High Court and forces the company into liquidation in order to pay outstanding debts.
- Even if your business doesn’t have any immediate or outstanding debts, you may feel like you wish to move and wind up the company. If all directors and shareholders are in agreement then a Members Voluntary Liquidation can be initiated and the company’s assets are divided out among investors.
Whichever route you take through the liquidation process, the importance of settling debts with creditors is of paramount importance. Even if you’re considering members voluntary liquidation it’s advisable to seek professional assistance and advice – there may be more options open to you than you realise.
It may be tempting for directors to try and settle debts before a company formally enters liquidation. This may be because they feel duty-bound to specific suppliers or that they have made promises they feel they need to keep. Alternatively, they may take the pragmatic view that using what cash they have available for key suppliers will hold them in good stead when they start up again. The more cynical may choose to settle debts owing to themselves or related parties.
This would be a mistake as settling overdue debts and giving certain creditors priority over others is a definite no-no. It is illegal to give priority and the liquidator could seek to have any such transactions overturned at a later date anyway.
Of course, there could well be overdue debts owing to the company itself. The responsibility for collecting these will sit with the liquidator and directors must not seek to collect debts or do deals separately from the process. Remember that a debt to the company is an asset and as such this is owned by the creditors and not the former company owners or directors.
During a compulsory liquidation or creditor’s voluntary liquidation, the main operations of the company will be handed over to liquidation professional. He or she will take the main duties from the director and oversee the effective running of the company, seeing that all assets are being used to pay off creditors.
It is illegal for a company to carry on trading while insolvent or undergoing liquidation procedures – getting professional assistance with your company liquidation procedures will not only keep you on the right side of the law, but will remove a great deal of stress from the process and allow you to wind up your company in the most stress free and effective way.