Few businesses in Northern Ireland are immune from the current economic downturn and many are faced with the decision as to whether or not they should cease to trade or continue to battle on in the hope that they can trade their way out of their present financial difficulty.

 

If a limited company is in financial difficulty simply ceasing to trade will not of itself bring a conclusion to the company’s affairs unless this is followed by some formal legal process such as liquidation.

 

What is Liquidation?

 

In simple terms liquidation is a legal process whereby a company’s assets are sold, or liquidated, and the proceeds from the sale of these assets are used to pay the company’s liabilities.

 

If a limited company is insolvent, meaning that it is unable to pay its debts as they fall due or that the value of its liabilities exceeds the value of its assets, then there are various steps that can be taken in order to place the company into liquidation.  A creditor who is owed more than £750.00 by a limited company can petition the High Court in Belfast to wind up a debtor company on the basis that it is insolvent.  This process is usually commenced by the issue of a statutory demand, being a formal demand for payment of an outstanding debt, followed by the issue of a winding up petition.

 

Alternatively, the directors of a limited company can make their own petition to the Court requesting a compulsory winding up order to be made on the basis that the company is insolvent.  This can be evidenced to the Court by sworn statements from the directors regarding the level of the company’s indebtedness to its creditors.

 

If an insolvent company wishes to enter liquidation without the Court’s involvement they may choose to proceed with a creditors’ voluntary liquidation.  This process involves the shareholders of the company passing a resolution that the company be wound up voluntarily.  If such a resolution is passed then a meeting of the company’s creditors is convened and they are informed of the outcome of the shareholders’ meeting.  The benefit of this process is that the shareholders of the company can nominate an insolvency practitioner whom they wish to act as the liquidator of the company, subject to the consent of the creditors. 

 

Regardless of how a company is placed into liquidation the liquidator’s role will be to realise all of the company’s assets in order to discharge the administrative costs of the liquidation and thereafter make a dividend distribution to the company’s creditors as far as possible.  Once the liquidation process is complete the liquidator will file a notice with Companies House who will then record the company as being dissolved in the companies registry.

 

Possible Alternatives to Liquidation

 

There are other insolvency processes that are available to limited companies depending on each particular company’s objectives and future intentions.  

 

(i) Company Voluntary Arrangement

 

If the directors of a limited company discover that their company is in financial difficulty and their primary aim is to salvage the company as a going concern then the directors could explore the feasibility of putting a proposal for a company voluntary arrangement (CVA) to its creditors.  Such a proposal will involve a full and frank disclosure of the company’s financial position setting out clearly the company’s assets and liabilities.  The proposal will make creditors aware that the company is experiencing financial difficulties and will demonstrate to the creditors the likely outcome if the company is placed into liquidation alongside the potential outcome of their proposed CVA, the latter of which should demonstrate a more beneficial outcome for the creditors.  The proposal is then put to a vote at a meeting of the company’s creditors and if the company can obtain the requisite level of agreement from its creditors then the CVA will be binding on all creditors.  This option can save the company from liquidation and thereby allow the company to continue to trade.

 

(ii) Administration

 

This process involves an application to the Court for the protection of an administration order on the basis that the company is, or is likely to become, insolvent.  If the application is successful the company will be placed under the day-to-day control and management of an administrator.  A company in administration becomes protected from its creditors who cannot disturb the business or recover any assets without the leave of the Court. This process is used as an attempt to save a company and to allow it to continue to trade whilst a plan is formulated by the administrator to rescue the business which commonly involves the sale of the company, or part of the company, as a going concern in order to maximise the return on the company’s assets or to propose some further alternative formal insolvency process such as voluntary liquidation or a CVA.  

 

Conclusion

 

Directors of limited companies should be mindful that they must act in the best interests of the company and its creditors at all times to avoid being susceptible to allegations of wrongful or fraudulent trading which may in turn have implications for them personally.  Directors should carry out periodic reviews of the company’s financial position and if there is any evidence of financial difficulty they should seek advice from a qualified insolvency practitioner at the earliest possible opportunity.

 

Jason Byrne

Partner 

McManus Kearney Solicitors, Belfast.