Let’s get the technical stuff out of the way first and then look at the practical implications and issues affecting insolvent companies and its directors.
The technical definition of insolvency is “the inability to discharge your liabilities as and when they fall due for payment”. That applies to both individuals, partnerships and limited companies.
The key really is the date when your liabilities i.e. your creditors are due to be paid. If you know that you will not have sufficient funds to discharge all of your creditors on the dates that they are due to be paid, then technically you or your company are insolvent. This is a much more common position than most people would anticipate, basically because most businesses are reliant upon their own customers paying them on agreed dates. Any slippage in receipt of anticipated funds could cause short term cash problems. It is how you deal with those short term problems that would determine whether or not you have complied with your statutory duties as a director.
The date of first becoming aware of a potential insolvent position is usually a highly emotive one for creditors of failed businesses. It is not unusual for creditors to allege that the directors ought to have known that the company as insolvent and would go bust and should therefore be prosecuted. We hear this quite a lot and whist we can understand the anger of creditors who have lost money, we need to be extremely focused on the facts.
When are Directors Guilty of Wrongful Trading?
For every company that fails and goes into administration or liquidation, there will be a point at which the directors are aware that the company cannot discharge its liabilities and should therefore either cease trading immediately and not incur any further credit, or immediately seek the assistance of qualified insolvency practitioners. To determine whether directors have acted correctly, we look at all of the facts and information that were available to the directors at the time that they should have concluded that the company was insolvent. If it appears that they allowed the company to continue trading after they became aware of its insolvent position and continued to incur credit without “ a reasonable belief” that the company could pay for it, then they may be guilty of wrongful trading. Any duly appointed administrator or liquidator could then look to instigate proceedings against the directors for recovery of funds.
If you find yourself thinking that you have a problem in paying suppliers, wages and salaries, HMRC, or your bank, then please call us immediately. We will listen carefully to your problem and will advise you of what to do next. If it is urgent, we can usually be with you within a couple of hours.
What are Insolvency Proceedings?
Another question that usually sits alongside the question of what is insolvency, is what are insolvency proceedings? Again, this is a fairly wide issue but briefly insolvency falls into two distinct categories – personal insolvency and corporate insolvency.
Personal insolvency relates to individuals and is dealt with usually through either a bankruptcy procedure or through an individual voluntary arrangement (IVA). Bankruptcy is a court process and can be instigated either by a creditor or the individual concerned can file their own petition.
Corporate insolvency covers a few different procedures:
- Members’ Voluntary Liquidation (MVL) – this is used where companies are solvent and are usually being wound up for tax reasons.
- Compulsory liquidation – this is where a company is wound up through the courts – usually by a creditor petitioning the courts
- Creditors’ Voluntary Liquidation (CVL) – this is the most common form of liquidation. The company will be insolvent and meetings of shareholders and creditors are convened to appoint a liquidator.
- Administration – this process also deals with insolvent companies, but is usually used where there is an opportunity of trying to find a buyer for the business.
Should you require any further information on any of the issues raised here, then please call us direct – we are more than happy to discuss any of these issues with you.