What is Corporate Insolvency?
Insolvency is when a business or individual cannot pay their debts.
Corporate insolvency is specifically when a company is unable to pay its business debts when they are due. It is against the law for company directors to continue to run the business and acquire more debts if a company is insolvent. Corporate insolvency can be a stressful time for businesses and it is important to understand the framework for dealing with legal issues that can arise to ensure that there is the least financial and emotional stress on all parties involved.
It is possible that if companies that do not have funds continue to operate they will then end up in administration which can include receivership, liquidation and deed of company agreement. A company can also voluntarily go into voluntary administration in order to investigate the financial position of the company and figure out the best solution forward. This article will detail what type of actions may occur if a company is found to be insolvent and some of the steps one can take to protect their business from corporate insolvency and when to seek out insolvency lawyers.
What actions can be taken against my company if it is facing corporate insolvency?
Companies facing corporate insolvency may face the liquidation of their business. This is the term used to describe the process of winding up a company’s business. Companies in liquidation will no longer be able to trade, give money to creditors or distribute any finances to their stakeholders and shareholders. Liquidation can occur a number of ways including the court ordering a company to liquidate its assets and voluntary liquidation that is commenced by the company. Members of the company can also start an action that voluntarily liquidates the company and prevents it from trading any further. When a company is liquidated its assets are then sold and the proceeds are distributed to creditors who are owed money with secured and unsecured creditors being the first to receive any funds and then shareholders. The company is then de-registered and no longer exists.
Companies facing corporate insolvency may face the appointment of a receiver who is usually appointed by a secured creditor or the court. Receivership can take place at the same time a liquidation of a company is taking place and means that the assets of the company are sold or used to provide benefit or finance to secured creditors. Receivers are appointed to a company by creditors and has a duty of care to all creditors and shareholders to sell the company’s assets for the best price possible in order to recoup as much money as possible. This is to ensure that the proceedings from the company’s sold assets will be used to pay secured and unsecured creditors the amounts that they are owed.
A director of a company facing corporate insolvency may voluntarily appoint administrators to take control of the company to see the best way possible to steer the company out of insolvency. The ultimate aim of voluntary administers is to see if they save the company from going bankrupt of from facing court ordered action such as liquidation. When a voluntary administrator is appointed company directors are suspended and the administrators will look at the most efficient strategies to navigate the company out of its precarious financial situation and see if it can avoid corporate insolvency.
A full review of the company’s finances will be undertaken with the results being reported to all creditors which will recommend the best course of action in relation to the company’s position in relation to its property, business structures and finances. Administrators can decide to allow the company’s directors to return to the helm of the company and end administration if they hold the belief that this will be in the best interest of the company. The administrators can also make an order that winds up the company if it is no longer financially viable and can then recommend appointing a liquidator. Another option available to the administers is for them to allow the company to approve a deed of company arrangement (“DOCA”) and allow the company to pay some of part of its debts and ensure that creditor returns are prioritised.
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