Insolvent Company, Viable Business – Restructuring Options.

The Liquidation of a company is never an easy decision to take. Deciding when the company is insolvent is often not clear cut. Often there are reasonable grounds for the directors of the insolvent company to continue to trade in the expectation that the company can trade out of the cash flow problems, which have often been caused by an unexpected event such as a bad debt, or a sudden loss of business due to external events, such as  the credit crunch.

Sometimes the directors’ mind is made up for them by an unsecured creditor sending in the bailiffs to collect on a county court judgement (ccj) or a secured creditor withdrawing an overdraft facility.  Banks have pretty good monitoring systems these days, so when a company breaches it’s banking covenants, or starts receiving writs or a ccj, the bank will know about it thanks to the electronic adverse credit monitoring systems we can all enjoy in the digital economy. Where a bank is a secured creditor, that is, it has a debenture granting a fixed and floating charge over the company’s assets, the bank has the ultimate sanction of appointing an Administrator.

Indeed, if the company owes money to an aggressive unsecured creditor who foregoes the debt collection route of applying at county court for a county court judgement, but instead applies for a winding-up petition, then the company is faced with being placed into compulsory liquidation, at which point the Official receiver attached to the county court local to the company’s trading address will be appointed Liquidator. Increasingly many creditors are using the winding up petition as a debt collection tool.

Compulsory Liquidation usually spells the end for the company and the business. However, Voluntary Liquidation can be a route to save the business, and/or a way for the directors/shareholders to exit the insolvent company and pass the winding-up over to an appointed Liquidator. At the point of Liquidation control of the insolvent company passes from the directors to the Liquidator who takes control of the company for the purpose of the winding up.

The directors face an investigation into their conduct by the Liquidator who will report to the BIS unit responsible for director’s misconduct if he finds any evidence of misconduct on the part of the directors. This is the irony of the situation where directors of an insolvent company who seek advice from an insolvency practitioner will often be advised that it is in their best interests personally to proceed to instruct the IP to assist with placing the company into Liquidation. Trading on whilst the company is technically insolvent places the directors at risk of being disqualified for a period of years. The directors often think that it is their duty to creditors to fight on and try and recover the situation and make sure that all unsecured creditors get paid. However, if they fail in the attempt and the liabilities end up greater than they were when previously advised to consider placing the company into Voluntary Liquidation or Administration, the risk of a disqualification is greater.

Administration is now the weapon of choice of the banks, this procedure now having largely replaced Receivership for all but older debentures on secured debt. Directors also can appoint an Administrator if this route is possible and appropriate and a more effective alternative in the situation than creditors voluntary liquidation (CVL). More on that subject on another day.

So if your company has a cash flow problem, and is short of working capital, and you need insolvency advice, the only thing that is certain is that doing nothing is not an option. Look at funding options, but also look at restructuring options.  The sooner directors take action, the better chance they have of controlling the situation for a better outcome.

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