Directors - What happens if company insolvent
If your company is insolvent, do not allow it to incur further debt. Unless it is possible to promptly restructure, refinance or obtain equity funding to recapitalise the company, generally your options are to appoint a voluntary administrator or a liquidator.
Voluntary administration is designed to resolve the company’s future direction quickly. An independent and suitably qualified person (the voluntary administrator) takes full control of the company to try to work out a way to save either the company or the company’s business.
If it isn’t possible to save the company or its business, the aim is to administer the affairs of the company in a way that results in a better return to creditors than they would have received if the company had instead been placed straight into liquidation.
A mechanism for achieving these aims is a deed of company arrangement.
Putting a company into voluntary administration is a simple and quick process. It can be done by the board of the company resolving that the company is insolvent, or likely to become insolvent, and an administrator should be appointed. The directors also need to obtain the written consent of a registered liquidator to act as voluntary administrator.
The purpose of liquidation of an insolvent company is to have an independent and suitably qualified person (the liquidator) take control of the company so that its affairs can be wound up in an orderly and fair way for the benefit of its creditors.
An insolvency practitioner will be able to advise you of the steps required to appoint a liquidator. Generally, a director-initiated liquidation involves calling a meeting of members to vote on winding up the company and the appointment of a liquidator or applying to Court to wind up the company.
A company most commonly goes into receivership when a receiver is appointed by a secured creditor who holds security over some or all of the company’s assets. The receiver’s primary role is to collect and sell sufficient of the company’s charged assets to repay the debt owed to the secured creditor.
A director who is also a secured creditor should seek advice before appointing a receiver.