Directors Guide to Business Insolvency

Advice on practical issues and suggestions in an easy to use 6 part guide.

You might say, “well what chance have I got, as a normal Director who’s just trying to drive a business and make a living, of understanding what constitutes insolvency and how rules operate?” Well, it’s certainly true that if your company IS insolvent you’re not likely to take the best detailed decisions without some specialist help.

So why this Guide
For Directors that are worried about falling foul of obligations and rules we have created this “print off and keep” Guide as a helpful Starting Point. It is designed to explain some basics for Directors that are worried about falling foul of their obligations.

It’s written in plain English and covers what we think you need to know, but, if there is a particular question you need answering, just telephone. We will be happy to chat through your particular problems in a friendly, “no-strings attached” way.

The Guide is also planned to assist your thought process at a time when you may not be “thinking straight…”

It helps you decide if your company is insolvent
It helps you work out what to do next and, crucially, what not to do so that you can steer clear of aggravation as far as possible
It sets out what you have to pay to get the deal done
It debunks a few pub myths in the FAQ section

Part 2 : Is my Company solvent

OK let’s take a deep breath… here is what YOU have to consider… and we say you because, as Director, it is your legal responsibility…

THREE TESTS

1. Cash flow Test
Basically this test can be summarised as follows :

Can the company pay its debts on the due date?
If you are in arrears with VAT or PAYE/NIC payments then the company could be insolvent.
If you are paying your trading partners later than agreed terms then the company could be insolvent.

2. Balance Sheet Test
Essentially this test can be summarised as follows:
On the face of the balance sheet of the latest management/financial accounts does it show that the company’s liabilities exceed its assets?
If they do then the company could be insolvent.
When making this calculation you should adjust for:

Contingent and potential liabilities not currently shown in the balance sheet
Bad debts that should be removed from the trade and other debtor totals
Obsolete and slow-moving stock that won’t fetch the figure that it is carried at in the balance sheet
Work in progress that you won’t be able to finish / invoice / be paid for

Careful Note Even if the company is solvent on this basis, it could still be insolvent if it is failing the cash flow test

3. Judgment Test
In essence this test can be summarised as follows:

Has a creditor obtained a County Court Judgment (CCJ) or issued a Statutory Demand against the company?
Is any creditor threatening or actually petitioning to Wind Up the company?

If they are then – unless related claims can be immediately remedied – the Company is definitely heading for Insolvency.

Compulsory Liquidation – Petition to Wind Up the Company

This form of liquidation is usually commenced by a creditor and is dealt with by the Court and therefore not “Voluntary.” Usually the creditor petitions the Court to wind up the company for unpaid debts. It isn’t as quick a result for the creditor as you might think due to the fact that the Court has to deal with thousands of such applications (petitions) per year and Court time is limited. However as soon as the petition is advertised in the London Gazette, the company’s bank account will customarily be frozen by the bank. Even if the debt is then paid the account will remain frozen until the advertised date of the hearing. This is because the Advert is effectively an invitation for all other creditors to join the action.

It is often beneficial for the Director to quickly place the company into Creditors Voluntary Liquidation (CVL). The CVL can then happen before there is time for the Compulsory hearing to occur, so that the Directors has direct control of the process.

Working out if your business is insolvent

Part 3 : My Company is insolvent! What does this mean for me as a director?

If your company has failed one or more of the above tests you should take Professional Advice right away.

This is because:

By law, the Directors of the company should act and promptly deal with the insolvent company.
The Director’s duties flip from being owed to the Company and its Shareholders, to being owed to its Creditors.

There may be some mitigating factors which mean that the company isn’t insolvent such as:

There’s additional capital or finance being injected to stabilise the balance sheet.
The company has a formal or informal arrangement with its creditors.
The company has realistic prospects of turning the corner e.g. it has a new acquisition or product that’s going great guns.
You have taken advice and have a plan that says it’s all going to work out fine.

If you don’t do what a reasonable Director would have done in your specific circumstances a number of unpleasant things that could happen:

The Director may be accused of wrongful trading. It’s a term frequently bandied about by disgruntled creditors, but its pursuit can often be averted by the right professional assistance.
Disqualification from acting as a Director if you are unfortunate enough to attract the attention of Insolvency Service investigators.
Dividends cannot be validly drawn, so money taken from the company could be treated as a loan and be repayable.
Potentially becoming personally liable for the company’s debts
There

Part 4 : So what should I do now?

Initial Key Steps

Take notes of any major decisions you make in case you are asked later.
Remember that Insolvency gives you a duty to the Creditors.
Meet with any other Directors, Shareholders and Management to discuss the situation – consider staff redundancy rules and notice requirements.
File all outstanding PAYE, VAT and tax returns, P11Ds etc with HMRC, regardless of whether they can be paid.
Take early advice. You are probably brilliant at doing whatever it is you do but can’t know everything about insolvency. Please call us. We will advise you, free and with no hidden obligations.

Creditors’ Voluntary Liquidation (CVL)

This is the most likely route to discuss. The company stops trading and its assets are “liquidated” into cash. The company’s liabilities, including staff and landlord liabilities are frozen and eventually written off less any dividend the creditors receive from the Liquidator. Whilst liquidation is “curtains” for the company the business of the company could survive in a new form. The liquidator may be able to sell it on to a 3rd party or even to you, should you wish to continue its trading.

The CVL process is started by the Directors deciding the company cannot go on and recording this decision. They then ask the shareholders to pass a resolution to liquidate the company.

When the shareholders of the company agree, the Directors ask a licensed insolvency practitioner to call a meeting of the creditors as soon as possible. The law says that you need to give creditors 7 days’ notice of the meeting and that at least one of the Directors must attend the meeting to answer questions and help creditors understand what has happened.

Normally this meeting will be a Virtual Meeting (VM) by telephone, but creditors with substantial owings can sometimes insist on a subsequent attended meeting.

The meeting of creditors votes to confirm the liquidator’s appointment.

Once the liquidator is appointed you are free of your responsibilities as a Director. You are obliged to cooperate in answering whatever questions may arise from the Liquidator’s own due diligence investigations or representations made to them by creditors. Largely, though, you are now free to get on with your new life/business.

You will be asked to fill in Questionnaire to provide information to the Insolvency Service. You also have to give the liquidator all the books and records of the company, either physically or by giving on-line access.
When all statutory work is finished the liquidator will finally dissolve the company

Part 5 : What process will you need to complete

If you think that a CVL is the right thing for you and your company then here is the likely process that will be followed:

1. Call us to help you decide if liquidation is appropriate to the company’s situation.

2. We review your financial and legal situation, to advise on having your affairs in best order before you formally cease to trade

3. Will assist you to appoint a Proposed Liquidator for your company who will :

convene a meeting of creditors
prepare a statement of affairs (the liquidation balance sheet of the company)
convene and manage the meeting of creditors
become the actual Liquidator so long as creditors confirm this

4. If appropriate we can appoint an independent Valuer to appraise any assets of the company. This is either at the company’s, or Director’s expense, but our group of Valuers keep these costs very low. Many Directors wish to buy back the company assets for use in their next project. Obviously, the price of used equipment, particularly where you are the previous owner, can compare favourably with buying new. If you don’t need, or want, equipment the valuer will dispose of it for the benefit of the company in liquidation.

5. The Proposed Liquidator will of course need a fair amount of information and there are rules to follow: They will:

(a) request a list of names, addresses and amounts for the creditors of the company so they can write to them all and invite them to the meeting and also compile the company’s statement of affairs. Hopefully the creditors will stop contacting you directly at this point.

(b) ask for other information relating to the company and he will give you a list of what he needs. These will be things like the books and records and minute book of the company (if there is one).

(c) arrange for the company’s shareholders to pass a resolution by a 75% majority to cease trading and liquidate the company and to nominate them to be liquidator. This resolution can be held at short notice if members agree but usually liquidators schedule a meeting for just before the meeting of creditors.

6. Creditors Meeting
The meeting of creditors normally takes place by telephone -a “Virtual Meeting” (VM). The company Director must attend and Chair the meeting (actually the Liquidator runs the show on the day and will guide you through the process). Creditors frequently do not attend the meeting even by phone and instead vote with a proxy post or email.

7. Once their appointment is confirmed at the meeting the Liquidator will:

Sell the assets of the business to realise all possible monies.
Verify and agree creditor claims for amounts they are owed.
Distribute any dividends to creditors where possible.
Report on the conduct of the Directors to the Insolvency Service.

Next action?

To succeed – especially with Insolvency -“the Devil is in the Detail” !

So if – after reading this Guide -you think that a CVL may be the right path, feel free to ring and discuss you situation fully, in strict confidence and with no hidden obligations.