 |
|
|
|
|
|
|
Insolvency
What is insolvency?
In principle, insolvency simply means
that the business is unable to pay its debts as they fall due.
The Insolvency Act (1986) sets out four tests for insolvency,
failure of any of which is taken by courts to prove insolvency:
| · |
Failure to deal with
a statutory demand |
| · |
Failure to pay a judgement
debt |
| · |
The court is satisfied
that the company is failing to pay its debts when due
('the cashflow test') |
| · |
The court is satisfied
that the company's liabilities (including contingent and
prospective ones) are greater than its assets ('the
balance sheet test'). |
If you are trading through a company
but are acting as a sole trader, you have unlimited liability
for all your own debts (business and personal).
If you are trading in a partnership, all the partners are liable
together and individually for the partnership's business liabilities
('jointly and severally').
If you are trading in a limited liability company the shareholders'
liability will be limited to any unpaid share capital.
Insolvency matters to company directors because if the company
fails, a liquidator can potentially:
| · |
Act to set aside some
transactions made when the company was insolvent, and |
| · |
sue the directors personally
for the company's losses. |
Additionally, their responsibility for the insolvency will be
taken into account when considering company director disqualification
proceedings.
The moral is, when in doubt, if you are concerned about solvency,
you should seek professional advice using local
help.
What insolvency procedures
are there/can be used in business rescue?
| |
Company
voluntary arrangement (CVA) |
Administration |
Administrative
receivership |
Liquidation |
| What
it is |
A
rescue procedure for saving the company and maximising
the creditors' return by proposal of a potentially binding
deal to creditors. |
Appointment
of an IP by a court to run the company to achieve specified
objectives which can include a CVA, the survival of the
company or a sale of its assets. |
Appointment
of an IP by a floating charge holder to sell the charge's
assets (ie the business) to enable repayment to the lender. |
Insolvent
liquidations are either compulsory when the court orders
the winding up of a company (usually on the basis of a
creditors' petition) or a creditors' voluntary liquidation
where the shareholders vote to wind. |
| Who
is in charge |
Directors |
IP |
IP |
IP |
| Use
in rescues |
Can
be used to propose a creditor standstill to allow an event
to occur (eg a sale or an investment) or, more commonly,
can propose a part payment of the company's debts over
a specified period in full and final settlement. |
Can
be used to obtain immediate protection for a company to
allow a CVA to be proposed or for a sale of the business
to be achieved. |
Can
be used to sell the business free of creditors and liabilities,
other than employee liabilities which transfer to a purchaser
(under legislation referred to as 'TUPE'). |
The
IP will cease trading immediately and look to sell the
business's assets. |
| Disadvantages |
Takes
time to put in place, during which a company can be wound
up. |
Expense
to set up |
Requires
a floating charge to be in place and the chargeholder
(normally a bank) to appoint. |
|
| Equivalent
procedures for sole traders and partnerships |
Individual
voluntary arrangement (IVA).Partnership voluntary arrangement
(PVA). |
Can
also be granted over a partnership |
N/A |
Bankruptcy |
What risks do directors face?
The key risks for directors and shadow
directors (people on whose instruction and direction the directors
have been accustomed to act) of insolvent companies are:
| Person |
Action |
Application
to partnerships/individuals |
| Insolvency
practitioner |
Can
act to set aside transactions made before the liquidation
in order to increase the assets in the pot available to
all creditors, such as:
| · |
preferences (you
paid what was owed to Joe, your brother, but didn't
pay any of the other creditors) |
| · |
transactions
at undervalue (you sold Joe the company Rolls
Royce
for £10 the day before the liquidation) |
|
Similar
rules apply |
| · |
wrongful trading
(continuing to trade past the point where you knew,
or ought to have known, that an insolvent liquidation
was inevitable) |
| · |
fraudulent trading
(trading in a way designed to defraud creditors) |
|
Sole traders
and partners are personally liable for all the business
debts in a bankruptcy |
| DTI |
Receives
a report on the directors' conduct from the IP and can
take action under the Company Director Disqualification
Act to bar individuals from becoming company directors.
In taking action they will take into account the degree
of responsibility for the failure, the amount of 'Crown
money' (PAYE, NI and VAT) kept by the business, the adequacy
of the books and records, and statutory filing, etc |
Bankrupts
are automatically barred from holding directorships during
their bankruptcy |
| Creditors |
Can seek
to recover money from anyone who has given a personal
guarantee ('PG') in respect of a company debt (eg the
company leased the photocopier but you personally guaranteed
the debt) |
Sole traders
and partners are personally liable for all their business
debts in the bankruptcy |
How do you protect yourself?
The basic steps you should take to protect
yourself from any insolvency related action are to ensure that
you are able to show that:
| · |
You took the appropriate
reasonable steps in the light of your knowledge at the
time; and
|
| · |
You took appropriate steps
to ensure that your knowledge was as good as it could
be.
|
| · |
You do so by demonstrating
that you have:
|
| · |
Prepared and maintained
accounts, trading results, and forecasts.
|
| · |
If in any doubt, taken
professional advice about whether you should continue
to trade, how you should treat creditors, and about any
major proposed transaction (eg refinancing or selling
major assets) which you can do by contacting local
help.
|
| · |
Held and minuted board
meetings to record decisions and the basis on which they
were made (ie the forecast and professional advice
received). |
Remember to keep copies of all such documents |
|
|
|
