Liquidation is the process by which a limited company’s assets are distributed to those having a valid claim against the company.
Many directors delay the decision to seek professional assistance for too long, often to the extent that the business has ceased to be viable. Where early advice is sought the best course of action open to the directors can be achieved. This can result in any of the formal procedures or other procedures such as an injection of money or new management being decided upon in good time.
There are three distinctly different types of liquidation:-
MEMBERS VOLUNTARY LIQUIDATION
This is where the company is solvent (i.e. it can pay its debts).
It is not the case that only insolvent limited companies enter liquidation. The shareholders may decide for reasons such as retirement or sale of the business that the limited company has no future and resolve to place it into members voluntary liquidation to enable the orderly disposal of assets, settlement of creditors claims and distribution to the shareholders.
CREDITORS VOLUNTARY LIQUIDATION
A creditors voluntary liquidation is instigated by the directors of the company who, having reached the conclusion that the company is insolvent and cannot be rescued, resolve to call meetings of shareholders and creditors to place the company into liquidation. It is usual that the directors will also appoint a Licensed Insolvency Practitioner to assist them at this stage. The Liquidator is not formally appointed until the shareholders pass a resolution to that effect. Except in certain circumstances, the Liquidators powers are considerably restricted until his appointment is ratified by the meeting of creditors, which may alternatively resolve to appoint another Licensed Insolvency Practitioner to replace the Liquidator appointed by the shareholders. Following the Liquidators appointment, it is his duty to realise the assets of the company, investigate its affairs and report to the Department of Trade and Industry upon the conduct of the directors; agree creditors claims and distribute the proceeds in the laid down order of priority. Liquidators of insolvent companies have wide ranging powers to assist them in both tracing assets and investigating the company.
In the event that a limited company is insolvent, the court, usually upon a petition presented by a creditor of the company, will grant a winding up order placing the company into compulsory liquidation. Usually, upon the making of the order, the Official Receiver (an officer of the court and a civil servant) will be appointed as liquidator of the company. If the Official Receiver considers it desirable he may call a meeting of creditors to appoint a Licensed Insolvency Practitioner as Liquidator to replace him. In certain circumstances he may, if the creditors fail to appoint a Liquidator, request that the Secretary of State appoint a Licensed Insolvency Practitioner directly. Where such appointments are made, the duties to realise assets, agree claims and distribute funds are passed to the new Liquidator.
In all compulsory liquidations however, it remains the duty of the Official Receiver to investigate the conduct of the directors and take any action he considers to be necessary.
Formal Insolvency Procedures – Rescue
COMPANY VOLUNTARY ARRANGEMENT (CVA) FOR PARTNERSHIPS AND LIMITED COMPANIES
Voluntary arrangements are agreements between your company and your creditors in full and final settlement of all outstanding debts.
CVAs are one of the most useful insolvency rescue tools available, which may be proposed by an insolvent entity in order to avoid liquidation and in turn preserve a viable business. Such arrangements require a Licensed Insolvency Practitioner to assist in the preparation of a proposal, and supervise the implementation of the arrangement. The scheme requires in excess of 75% in value of those creditors voting, to support the arrangement for it to be accepted and become legally binding upon all the creditors. Such arrangements have tax advantages over informal deals with creditors. The proposal can be extremely flexible and can be used even in circumstances where debt recovery or winding up proceedings have been commenced.
Protection from recovery action is available under a small companies moratorium when you are seeking to promote a CVA.
CVA’s do not affect the rights of secured creditors such as mortgagors and debenture holders. Professional negotiations with such creditors can usually ensure that voluntary arrangements are acceptable to such creditors.
An administration order may be granted over a limited company or a partnership, which is, or is likely to become insolvent. The procedure is designed to preserve and protect the businesses while arrangements are put in place to achieve the specific objectives as laid down in law. An Administration Order can be obtained with very little Court involvement, ensuring a speedy procedure.
The control of the company or partnership will be placed into the hands of the Administrator, a Licensed Insolvency Practitioner, who has extensive powers to undertake this task. Once the administration order is granted, creditors are prevented from recovering assets or taking any other action against the business without the permission of the court, or the consent of the Administrator. Administration orders are usually sought to provide a breathing space whilst those involved in the business consider the next step.
It is usual for another procedure, such as a voluntary arrangement or liquidation, to follow on from administration.
Businesses can be sold in the furtherance of rescuing the business or achieving the statutory purpose of the Administration process as set forth by an Administrator.
Formal Insolvency Procedures-Other
An important impact of the new legislation is that over time it will remove the ability of a loan creditor (usually the bank) to appoint an Administrative Receiver.
An Administrative Receiver is appointed by the holder of a debenture that incorporates a floating charge over a limited company’s assets. Such charges are usually granted by the company to secure a loan, overdraft facility or other credit agreement. More often than not, the company’s bankers hold such a debenture and can appoint an Administrative Receiver. The Administrative Receiver, who must be a Licensed Insolvency Practitioner, is appointed by the debenture holder when the borrower is in default or in breach of the terms of the loan agreement. He may be appointed quickly and his appointment requires no court order or meeting of creditors. The Administrative Receivers primary responsibility is to recover the money due to his appointor, the debenture holder.
OTHER CORPORATE MATTERS
The insolvency team also advises on the following matters;
- Directors’ disqualification
- Successor companies – pitfalls
- When dividends are or are likely to become illegal and repayable
- Insolvency investigations
Where Can I Find Out More?
This is a brief synopsis of the insolvency procedures available, it is not intended to be a comprehensive guide to what is in effect an extremely complicated and specialised area of law. Similar procedures apply to Limited Liability Partnerships
LA Business Recovery is able to advise you or your client at very short notice and in the strictest confidence. Please contact David Hughes or Virgil Levy on 01895 819 460 or click here to email us