Read below some Frequently asked questions about insolvency, liquidation and bankruptcy.
What should I do if insolvency appears likely?
Do not bury your head in the sand! If you are a company director, you should certainly not just resign (which could be a breach of your duty as a company director) and do not just continue to trade (which could lead to personal liability). Take advice as soon as possible and act on that advice and, in particular, do not transfer assets without first obtaining advice.
What is liquidation?
Liquidation is a formal insolvency procedure that brings the existence of a company to an end. There are three main methods for liquidation; members’ voluntary liquidation (when a company is solvent), creditors’ voluntary liquidation (arranged by an insolvency practitioner in consultation with creditors) and compulsory liquidation (through the Court, initiated by the directors or a creditor owed £5,000+). In each a liquidator will take over from the directors and assume day to day control of the company. The main duty of the liquidator is to realise the assets of the company and to look into the actions of the company and its directors to make sure that all assets have been declared and that there haven’t been any transactions that could be reversed.
What is administration and what is a “pre-pack administration?
An administration order is an order that can be made, out of court, by either the directors or shareholders of the company or by the company’s bank if it holds a qualifying floating charge. Alternatively, an administration order can be made by the court by the company’s creditors. In either case, an administrator is appointed to deal with the company’s financial affairs from the time the order is made. This offers protection to a company from claims by creditors while a financial solution is sought. Pre-pack administration is a process which sees a business sold within an administration on the basis of a deal – very often with the directors of the company – in advance of the formal administration process. The benefit is that the directors can purchase some or all of the company's assets before it goes out of business, often through a new company, which will seamlessly carry on with the work in progress with the same assets, staff, customers, etc.
What is a CVA?
A Company Voluntary Agreement (CVA) is a legal procedure whereby an insolvent company reaches an agreement with over 75% of its creditors to repay all or part of its debts on a basis that the company can afford. The existence of the CVA means that creditors cannot pursue legal action against the insolvent company.
What are the consequences of being a director of a company which has been put into administration or liquidated?
You could be made personally liable for your company's debts and could face criminal prosecution, a fine, and/or disqualification as a director. If you have personally guaranteed the company's debts you will be required to honour those guarantees. For the next five years you are not allowed to be a director of another company with a similar name without the court's permission.
What powers to recover assets does a liquidator or trustee in bankruptcy have?
Liquidators/trustees in bankruptcy have many powers through the court to force the release of property, information and documents. He or she can seek orders forcing directorsmand others who have traded wrongfully or fraudulently to make contributions to the company as the court thinks fit and for the recovery of assets of the company on the basis of these being transferred at an undervalue, preferentially or in breach of a director's duty.
Will I be disqualified as a director?
In reality this seems unlikely as less than 10% of directors of insolvent companies are disqualified. But disqualification proceedings may be brought if warranted by the directors conduct, but even in those cases the Insolvency Service would usually seek to obtain an undertaking from the director which has the same effect as a disqualification order. The minimum period of disqualification is 2 years and the maximum 15 years and prevents an individual from being a director of a company or being concerned in or taking part in the promotion, formation or management of a company.
What is personal bankruptcy?
This can be initiated by a creditor, as long as over £5,000 is owed. Following a bankruptcy order the Official Receiver takes ownership of all assets apart from any that are necessary for your business or basic domestic needs and investigates the financial background to the bankruptcy. Bankruptcy lasts for a maximum of twelve months (it be less in some cases), although your conduct may cause the court to impose a bankruptcy restriction order on you for between two and fifteen years after you are discharged from bankruptcy.
What is an IVA?
An individual voluntary agreement ('IVA') is similar to a CVA but in respect of an individual. An IVA can be entered into either before or after a bankruptcy order has been made.
What are the insolvency options for a partnership?
These are similar to those for a company: winding up, partnership voluntary arrangements and administration orders. A partner can be made personally bankrupt, with the debts of the partnership ranking as a claim in your bankruptcy alongside the claims of personal creditors.
If you have any questions or would like to discuss your situation, please call us on 0117 926 4121.