Insolvency options for companies
Unlike a sole trader or partnership, a limited liability company has the benefit of being a separate legal entity from its directors and shareholders.
A company is technically insolvent when it cannot pay its debts as they fall due or where the liabilities exceed the value of its assets.
In general terms, company directors have a duty of care to the company, its shareholders, employees and creditors.
A company director is not personally liable for the company's debts. However they can be personally liable for:
- Personal unpaid NI and PAYE deductions
- Unpaid income tax as a result of 'cash drawings'
- Personal guarantees given to banks, finance companies, landlords etc
- 'Wrongful trading' - Liabilities incurred as a result of insolvent trading prior to the company ceasing to trade resulting in a benefit from the transaction at an undervalue and/or preference
- Any liability resulting from fraudulent trading
The business is in difficulty - What are the options for limited liability companies?
There are several options and strategies available to limited liability companies which are technically insolvent or which have major cash flow problems.
Company insolvency: Turnaround, formal and informal arrangements
If, after analysing the business the conclusion is that it is worth saving then a strategic plan of action should be created to address specific areas of weakness such as:
- Cost reduction
- Capital restructuring
- Concentration on profitable products
- Disposal of part of the business
- Improvement of financial controls
On the basis of the strategic plan, informal arrangements can be made with creditors to pay off the debt.
Formal arrangements provide an effective strategy but will require the help of a licensed insolvency practitioner.
For further information see Turnaround, formal and informal arrangements.
Company Voluntary Arrangement (CVA)
The business is fundamentally sound but has cash flow difficulties and needs time to recover. The CVA provides a legally binding formal agreement with company creditors for the settlement of company debts over an agreed time scale.
For further information see Company Voluntary Arrangement.
Company administration
Under the provisions of the Enterprise Act 2002 the ability of a company to go into administration became easier.
In all cases a licensed Insolvency Practitioner is appointed to take control of the company and its affairs to assess the business, with the objective of making formal proposals that will allow a turnaround, or to come to arrangements with creditors which provide a better realisation of the company's assets.
For further information see Company Administration.
Company Administrative Receivership
This is known more generally as Receivership and is where the company assets are realised by the Insolvency Practitioner to repay a major creditor who holds a significant security over the assets e.g. a finance company.
For further information see Company Administrative Receivership.
Company Liquidation
The appointed Insolvency Practitioner realises the company assets which are then distributed among the creditors according to their legal priority i.e. secured creditors are paid in priority to unsecured creditors - typically suppliers.
For further information see Company Liquidation.
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