If a company does find itself experiencing trading difficulties, then there are many available options:
Administration is a procedure which allows for the reorganisation of a company or the realisation of its assets under the protection of a statutory moratorium.
An administrator is appointed to control the affairs of the company and takes over control and management of the company’s business and assets in order to achieve one of the statutory purposes of Administration, which might be to rescue the business of the company or to obtain a better outcome for creditors than would be achieved in a liquidation.
Liquidation is an insolvency procedure through which the assets of a company are realised and distributed to creditors by an appointed liquidator.
Liquidation can be compulsory (instigated by a creditor through the courts), otherwise known as a winding up, or voluntary (instigated by the company itself where it is unable to continue trading).
Liquidation always results in the ultimate dissolution of the company.
Company Voluntary Arrangement
A Company Voluntary Arrangement involves the company and the creditors reaching an agreement regarding the payment of the debts of the company and with a view to avoiding liquidation. It is implemented under the supervision of an insolvency practitioner and it binds all unsecured creditors of a company who were entitled to vote and who would have been entitled to vote had they received notice of it. As such, it binds known and unknown creditors.
As well as helping companies that are in financial difficulty, we advise directors on the personal consequences of insolvency of their company.
It is often a delicate balancing act for directors to determine when they should cease trading and directors must be careful to avoid the risks and consequences that may arise if a company were to continue trading while insolvent.
Our insolvency and restructuring team is experienced in advising directors on their duties and obligations in connection with insolvent companies.
Generally, the directors of a company are not personally liable for the debts of a limited company. However, if a director has given a personal guarantee in respect of a company debt, it is likely that he will be pursued for that debt under the personal guarantee in the event that the company is unable to pay it.
Once directors of a company concludes that there is no reasonable prospect of the company avoiding liquidation, the directors have a duty to take steps to minimise the potential loss to the company's creditors.
If the directors fail to comply with this duty, it is possible for any subsequently appointed liquidator or administrator of the company to seek an order from the court for the directors to make a personal contribution to the company's funds or assets, so that there is more money available for the company's creditors. Liability will arise if, on a net basis, it can be shown that the company is worse off as a result of the directors continuing to trade when they knew or ought to have known that at some point before the commencement of the insolvent liquidation or administration, there was no reasonable prospect that the company would avoid going into that insolvency processes.
Fraudulent trading is a criminal offence.
If it appears that the business of the company has attempted to defraud creditors, or for any other fraudulent purpose, the liquidator of the company can seek an order from the court that requires anyone who was knowingly a party to the fraudulent activity to make a personal financial contribution to the assets of the company so that there is more money available for distribution to the company's creditors.
The liquidator must show that there was actual dishonesty.
Misfeasance or breach of fiduciary duty
Directors owe duties to the company, its shareholders and its creditors. If a director acts in breach of these duties, for example in relation to the misapplication of company's assets, this is known as misfeasance. If a director is guilty of misfeasance then they may be ordered to repay, restore or account for money or property or contribute a sum of money by way of compensation as the Court thinks fit.