My company is insolvent. What do I need to do as a director/shareholder?
If your company is insolvent, you should immediately stop trading. It is illegal to trade whilst knowingly insolvent – this is called ‘wrongful trading’, a civil offence under section 214 of the Insolvency Act 1986.
You cannot do anything which would lead people to believe you have a viable company or worsen the position of your existing creditors. As a director, you have a duty of care to your creditors.
It is essential to take professional advice quickly so that you are fully aware of the options available to you. Acting promptly will potentially give you more choices.
If your business is still viable but struggling with cash flow and in receipt of letters threatening legal action from creditors, you might consider a CVA – Compulsory Voluntary Arrangement.
A CVA can allow you to retain control of your company and carry on trading through cash flow problems. A CVA is a legally binding agreement with the company’s unsecured creditors.
An alternative to compulsory liquidation is a Creditors’ Voluntary Liquidation (CVL) to liquidate the company voluntarily. A CVL differs from a compulsory liquidation in that the court does not manage the process. There may still be opportunities to reinvent the business as a new entity.
The final option is compulsory liquidation. Compulsory liquidation may be the only choice available if the company is no longer viable. It may end up being the default position if prompt action isn’t taken sooner to save a viable business.
Compulsory liquidation starts with a Winding Up Petition (WUP), but there is still a narrow window of opportunity to salvage the business if you take swift action.
Failure to take immediate action will result in company bank accounts being frozen, forcing the company to cease trading. This really is the point of no return.
In the absence of any action by the company, the court will issue a winding up order. The company will be liquidated, and all the assets will be sold to benefit the creditors.
As litigation solicitors, we assist companies and shareholders in trying to force insolvency on others for commercial reasons or to create leverage. Alternatively, we also help our clients who are trying to avoid insolvency. We are not insolvency practitioners.