Due to the volatile nature of running a company today, it is likely that a number of companies will run into financial difficulty.

Directors must make an early decision on whether the business should cease to trade. Failure to do so may result in the directors having to contribute personally to the company's losses and be heavily investigated by the Department of Industry (DTI).

Under UK law, if a company is trading insolvent, a director may be liable for wrongful trading. If the director knew or should have known that the company could not avoid becoming insolvent but still continues to trade then he or she must cease to trade immediately and take steps to liquidate the company.

The director of a company which is facing financial difficulty should ensure that there is a reasonable prospect that the company will avoid insolvent liquidation before being party to any decision to trade on.

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Steps for survival

Deciding whether to continue to trade or not can be a huge problem.
Directors of companies experiencing financial difficulty should never ignore the early warning signs that can threaten a companies survival and should therefore take the following steps:

• Ensure that they meet regularly to discuss current events
• Utilise accurate and up to date accounting information to assess day to day cash-flow
• Keep detailed records of the discussions taking place at meetings
• Ensure that any decision to continue trading is reviewed on a very frequent basis
• Seek expert advice if the viability of the business is in doubt

Directors may escape liability for wrongful trading if they can prove adequate steps were taken to minimise the loss to creditors after it became apparent that the company was insolvent.

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The Facts

In the five years from 1991, an average of 23,294 businesses failed every year. Research has revealed that, if you have a customer that goes bust, you will be lucky to get back more than 10p in the pound on any outstanding debts.

How many bad debts like that could your business cope with, before it too became an insolvency statistic? And, if your business were to go bust,
what would happen to you?
Would you lose your job?
Would your house go to pay the business's debts?
Could you be forced into personal bankruptcy?
Could your inaction lead to disqualification as a director?
Might you find yourself facing fines or even prison?
Worst of all - would your relationships with those near and dear to you survive the failure of your business?

Sadly, too many businesses fail because directors seem to believe it can never happen to them. It can - many businesses find themselves in an unexpected crisis. Hard choices may need to be made. But, if symptoms were identified early enough, many more businesses would survive finacial difficulties.

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The Choices

A company experiencing financial crisis will not always find itself the subject of insolvency proceedings - seeking advice at an early stage can result in a less terminal solution being found.

There are four main types of insolvency proceedings for limited companies

Two procedures Administration and Company voluntary arrangement are designed to allow a solution to be found for the companies survival

Two procedures Receivership and Liquidation are designed to bring the activities of the company to an end

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Rescue Company Procedures

Administration
This is a constructive process of trying to save a company. It is designed to hold a business together while plans are drawn up to rescue the business, sort out the problems and allow the company to restructure.

Application for this procedure is made through the high court and on the application being made it gives immediate protection from all its creditors including hire purchase and lease creditors. In other words, all the companies assets are protected to enable a plan of action to be put in place.

Company voluntary arrangement
This procedure allows a limited company to negotiate an arrangement with its creditors by which the creditors agree to a reduced amount paid back over a period of 1-5 years in full and final settlement.

When the proposal takes effect it binds all creditors who had notice and were entitled to vote at the original meeting.
It enables:-

• Possible survival of the company as a going concern
• Job saving
• Creditors to receive payment, albeit reduced
• No credit restrictions

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Winding-Up Company Procedures

Receivership

• This is where the debenture holder or charge holder (usually a bank) appoint a receiver to assess the worth of the company and restructure, possibly selling all or part of the company in order to recoup its investment.
  
• The receiver's aim is to recover the value of the lenders security, and for this purpose the receiver has the power to carry on the companies trade and realise its assets.
  
• The receiver acts invariably as the agent of the company unless or until it goes into liquidation. The receiver will often seek an indemnity from the bank.
  
  

Liquidation

Where the core business is unprofitable, and there is no hope of a trading solution, liquidation is the likely result. There are three types of liquidation.

Creditors voluntary liquidation
when the company makes the decision
The directors call meetings of the members and creditors of the company in order to appoint a liquidator
The members appoint a liquidator but this has to be ratified by the creditors
The creditors have power to appoint an alternative liquidator
The role of the liquidator is to realise the assets of the company and to distribute them to the creditors in order of priority and return any surplus to the shareholders

Compulsory liquidation
When the company is wound up by a creditor
A creditor who is owed £750 or more can instigate this form of winding up
The creditor presents to the court a winding up petition against the company
The company, its directors and shareholders may also present a winding up petition
Initially the official receiver is appointed as liquidator but a licenced insolvency practitioner may be appointed in due course

Members voluntary liquidation
When the company can pay its debts in full - this only applies to a solvent company
This process is normally instigated because of a need to restructure or cessation of trade
In this type of liquidation the directors of the company swear a affidavit that the company can pay its debts in full within twelve months
A licenced insolvency practitioner is appointed to carry out this task

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What can we do?

• We Provide Tailor Made Solutions To People All Across The Country
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If you are involved in a company that may be experiencing problems please do not hesitate to contact us now on 0114 2797888 or send complete the online form.