How to manage an insolvency process

John Bell, director and founder of Clarke Bell, discusses how a company can manage an insolvency process when going out of business is the only option

COVID-19 is not only a health crisis but it is a wealth crisis too, and over the coming days, weeks and months many small businesses will be closing their doors forever as they succumb to the impact the virus has had on them. Deciding to liquidate your business because it’s insolvent is a big step and can be a stressful time for company directors. However, in the current climate, businesses of all sizes are going to suffer and, in particular, many small businesses from one-man limited company contractors and larger will not survive the turmoil.

John Bell is the director and founder of insolvency firm Clarke Bell. His advice to any owner of a company is to take control of your situation and seek professional help as soon as possible. A Licensed Insolvency Practitioner will be able to advise you on what is your best option for dealing with your company’s debts. For most insolvent companies, this is a process called a Creditors’ Voluntary Liquidation (CVL).

If your insolvent company needs to be liquidated and you care about your future business reputation, it is far better to liquidate your company voluntarily via a CVL – as opposed to being forced into compulsory liquidation.

A company director can propose a CVL if their company cannot pay its debts, i.e. it is insolvent and the shareholders agree and pass a ‘winding-up resolution’, whereby a Licensed Insolvency Practitioner takes control of the company assets with the intention of either repaying creditors or distributing the money realised to shareholders. Business owners need to understand that a CVL is not a Compulsory Liquidation – which occurs when a creditor attempts to force a company out of business in order to recover any debts owed to them.

Once a company does embark on a CVL it will stop trading and be wound up. A CVL is a formal recognition of your duties as a director to any of the company’s creditors.

What is the process?

Before liquidation proceedings can start, a company needs to have stopped trading and provided the insolvency practitioner conducting the process with the following:

  • Two forms of identification for each director and all shareholders who hold 25% or more shares in the company
    •Completed History and Information Gathering Questionnaire and Completed Pension Questionnaire
    • A full list of creditors, including name, address and amount outstanding
    • A full list of employees who have been made redundant
    • Copies of the last 3 years accounts, if applicable.

The insolvency practitioner will prepare all the documentation that is required for the CVL process and will liaise with any required external parties such as The Royal Institution of Chartered Surveyors (RICS) valuers for valuing any company assets. Dependant on the company’s Articles of Association, a company could be placed into liquidation within approximately 7-14 days.

Two Meetings are required to do this:

At the Board Meeting, the company directors formally agree that the company is insolvent and cannot continue to trade. At this meeting, the directors would also agree to appoint their chosen insolvency practitioner as the liquidator of the company, as well as agreeing for the necessary Meeting of Members to be summoned.

The Board Meeting is generally held at the director’s home or office and it is not essential for the insolvency practitioner to attend.

The Members’ Meeting is normally held approximately 14 days after the Board Meeting and can be convened at short notice, should the statutory percentage of members agree to this. This meeting would usually be held at the insolvency practitioner’s offices and the company directors must attend. Before the meeting, which normally lasts 15 minutes, can take place, the company’s books and records should be provided. With that meeting done, the company is now informal voluntary liquidation.

Ratify the appointment of a liquidator

Once the Members’ Meeting has been held, the creditors still have to ratify the appointment of the liquidator. Under the new Insolvency Rules which came into effect in April 2017 there is no longer a requirement to hold a Physical Meeting of Creditors to ratify the appointment of the liquidator. The appointment can now be deemed as accepted unless sufficient creditors object to this. This is the “Deemed Consent Procedure”. Alternatively, a “Virtual Meeting of Creditors” can be held where the creditors attend by conference call rather than in person.

The insolvency practitioner will keep a register of any objections. As soon as 10% of creditors who would be entitled to vote at a meeting object, then the deemed consent process automatically terminates and a physical meeting needs to take place.

It is also possible for creditors to requisition a physical meeting, but in order for one to be summoned it must be explicitly requested by either:

  • 10% of the total creditors (by value); or
  • 10% of the total number of creditors; or
  • 10 individual creditors.

This is known as the ‘10/10/10 threshold’.

Once this ‘10/10/10 threshold’ has been met, or if enough objections to the Deemed Consent Procedure are received, a physical meeting will be convened within three days and the directors notified that they will be required to attend the meeting. While every effort will be made to ensure that it is held on the same day as the Members’ Meeting – for everyone’s convenience – that will not be possible if the request for a meeting or objections are received after the time of the Members’ Meeting. It is to reduce the chances of that happening that the Member’s Meeting is usually held in the late afternoon since creditors can object at any time up until 23.59 hours that day.

Since the new Insolvency Rules were introduced, it is very rare that a Creditors’ Meeting is explicitly requested, although there are occasionally objections raised to the Deemed Consent Procedure.

A note of caution

When a company gets into cashflow difficulties, some directors, wrongly, choose not to pay the taxes that are due to HMRC – e.g. Corporation Tax, PAYE, VAT and NIC. The company does, however, continue to pay other parties, such as their suppliers. These payments may be ‘preferential’ payments but are certainly to the detriment of HMRC. In the event of insolvency, this could lead to a director’s disqualification. In fact, this is one of the most common reasons for considering whether someone is unfit to be a director. Under the rules of the Company Director Disqualification Act 1986 (CDDA), a director can be disqualified for between two and 15 years.

An insolvency firm will look into this and other matters relating to the conduct of the directors and the affairs of the company and are required by law to submit information to The Insolvency Service about the conduct of all those who have been directors, or shadow directors, of the company within the 3 years prior to liquidation. This must happen within 3 months from the date of liquidation.

COVID-19 is wreaking havoc on small businesses and taking the decision to wind up your business correctly before matters get out of control is the best course of action. With proper advice and support, it needn’t be such a daunting prospect and will help you to come to terms with the situation and plan for your future.

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