By law, directors have a responsibility to creditors not to put them at risk whilst trading an insolvent company. An insolvent company is simply defined as one that is either not able to meet its debts as they fall due, or if the company’s liabilities exceeds its assets.
Company directors could face the prospect of being prosecuted if found to be trading a company whilst it is insolvent.
You and your business are separate legal entities. The concept of limited liability differentiates your company from you, and offers you protection from company creditors. If your business gets into financial difficulty you do not have a legal obligation to pay your creditors, unless you owe the company money or have signed personal guarantees.
Many company shareholders receive advances from their companies in the form of drawings, instead of receiving a wages. This results in shareholders building up monies that they effectively owe back to the company. At liquidation these monies are crystallized and recognized as a company asset, to be recovered by the liquidator.
For most business owners, the signing of a personal guarantee is part and parcel of doing business. Typically banks, landlords and suppliers require these guarantees as a prerequisite to doing business with your company.
A liquidation can be triggered by a creditor issuing a statutory demand requesting payment within 15 working days. If a dispute is not raised, non compliance can result in the court being asked to put the company into liquidation.
Shareholders and directors of companies also have the option of voluntarily putting a company into liquidation for various different reasons.
It is important to note that you do have some control over this process in that you can choose to appoint a liquidator rather than have to accept a liquidator appointed by a creditor or the court.
A liquidator will be appointed to take control of the company at a set time and date. Once this happens the liquidator will take full control the business. The liquidator will then be required to realize the company assets and distribute any proceeds to creditors.
The liquidator will proceed to sell the assets of the company, collect any outstanding debts and then pay out creditors and shareholders in the following order.
- Liquidator costs and fees.
- Secured creditors
- Employee costs
- Outstanding PAYE and GST
- Unsecured creditors and shareholders.
A company is liquidated and individuals are declared bankrupt. Just because a company is liquidated it does not mean that individual directors and shareholders are declared bankrupt.
As a director or shareholder of a liquidated company, there are very few restrictions regarding your ability to continue your normal business and personal affairs, as if the liquidation had not occurred.
In stark contrast, a person who has been adjudicated bankrupt will have severe restrictions placed on their business and personal affairs for an extended period of time.
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