What Does it Means If A Company Files for Insolvency?
If a company files for insolvency, it means it cannot pay its debts and wishes to take action to rectify the situation. This can be done by filing for liquidation or examinership. The right option depends on the company’s circumstances, such as whether it wishes to carry on trading, or whether it is time to ‘wind up’ operations.
Companies that are facing insolvency require immediate legal advice from a commercial insolvency and bankruptcy solicitor. To discuss your options with a specialist lawyer, please contact us at Gibson & Associates.
What is company insolvency?
A company is deemed insolvent if it cannot pay its debts when they fall due. If you think your company is insolvent, or is soon to be insolvent, you must take action straightaway. Ask yourself – can the company pay its debts? If the answer is no, or you’re not sure, speak to your accountant or financial advisor.
If your accountant or financial advisor confirms that the company is insolvent, it is better be proactive. If you act fast enough, you may be able to save the company and continue trading. Even if this is not possible, you can retain greater control over the situation, potentially avoiding involuntary liquidation.
What are the options for an insolvent company?
A company that cannot pay its debts does not ‘file for insolvency’. This is a misnomer. Rather, it is insolvent, in that it does not have sufficient funds to pay its creditors. It must then decide whether to file for:
These are the main options available to an insolvent company. The best approach will depend on the extent of the company’s debt, the wishes of the directors, and whether the creditors take action to recover their money.
If an insolvent company does not file for liquidation or examinership, it may go into receivership.
Liquidation is the ‘winding up’ of the company. The company’s assets are sold off and the proceeds used to pay creditors. The business then comes to an end and ceases trading.
There are two types of liquidation: voluntary liquidation and involuntary liquidation.
Voluntary liquidation is when the company directors and creditors work together to liquidate the company. If the company is insolvent, then this type of liquidation is known more specifically as Creditors’ Voluntary Liquidation (CVL). There will be a series of meetings, during which the creditors and directors will make the decision to proceed with liquidation, and appoint a liquidator.
If the company is not yet insolvent, it will be possible to proceed with Member’s Voluntary Liquidation (MVL) instead. This is when the directors and shareholders take the decision to wind up a company, while it still has sufficient funds to pay creditors. Once the debts have been paid off, any remaining assets can be split as the directors see fit. This allows the directors to retain control of the liquidation process, without the involvement of the creditors.
If a company does not file for insolvency itself, then a creditor may petition for the company to be liquidated instead. If the court agrees that a company cannot pay its debts, a liquidator will be appointed to manage the official liquidation process. The court will make this decision if:
- A company has been served a demand to repay a sum exceeding €1,250 and this demand has not been met within three weeks
- A court order has been issued in respect of the debt but it remains unpaid
- The court is satisfied that the company cannot pay its debts
The court may also order the liquidation of a company if it is just and equitable to do so.
The role of the liquidator
When a liquidator is appointed – whether by a voluntary or involuntary arrangement – the liquidator will take control of the company’s assets. The liquidator will then identify the company’s creditors and decide how best to use the remaining assets to repay them. The law places creditors into an order of priority, depending on factors such as whether the debt is secured or unsecured. This determines which creditors should be paid first.
Once the liquidator has fulfilled their duties, the company will be dissolved.
Examinership is when the court protects an insolvent company from its creditors for a set period of time, giving it space to get the business back on track.
Examinership is only possible if an independent accountant believes that the company has a ‘reasonable prospect’ of survival. In effect, it means that while the company is insolvent now, it may be possible to restructure the business so that it becomes solvent once again. This would prevent the company from going under, reduce creditor balances and allow the company to continue trading.
To get examinership, an application must be made by the court. Often, this is made by the company directors, although it may also be made by a creditor. If the court believes that the company meets the qualifying criteria, and agrees that examinership is suitable, then an examiner will be appointed to work with the company. The eligibility criteria for examinership are that the company:
- Is insolvent
- Cannot pay its debts
- Has a reasonable prospect of survival
How does examinership work?
If an examinership petition is approved, the court will protect the company from its lenders for a set amount of time, up to a maximum of 100 days. During this period, the creditors cannot take action against the company.
The court-appointed examiner will then inspect the company’s finances and formulate a strategy for its survival. This might include restructuring the company, securing investment, and preparing a ‘scheme of arrangement’ which outlines how creditors’ debts are to be paid. The examiner’s proposals must be agreed by the court and (where applicable) the creditors. If the court confirms the examiner’s proposals, they become binding.
Advantages of examinership
Examinership offers a company the chance to return from the brink of collapse. Lots of businesses fall on hard times, perhaps due to difficult market conditions or an unforeseen crisis. However, that is not to say that the company cannot recover in the long-run. But without examinership, most companies do not have the breathing space in which to execute a survival strategy, as their creditors are quick to petition for involuntary liquidation. This denies the company the opportunity to salvage the situation.
If a company does not take action to manage its debt, it faces the threat of receivership. This is when a creditor seeks to recover their money, as per the original contract.
The creditor will appoint a receiver, either through the courts or by agreement. The receiver can then take control of the company’s assets, with the aim of recovering the outstanding debt.
If a company is insolvent, this may lead to liquidation proceedings. Even if the company is not insolvent, the unexpected repayment of a large debt may throw the company into turmoil, making it impossible to continue trading.
When a receiver is appointed, the company may be able to overturn the appointment by applying for an examinership. There is a very small window of opportunity in which to achieve this, so immediate legal advice is essential.
What should an insolvent company do?
A company does not ‘file’ for insolvency. It either can pay its debts, or it cannot. In this sense, a company is either solvent or insolvent.
If your company has reached insolvency status, or it is soon to be insolvent, you should not bury your head in the sand. By taking early action, you can decide what happens to the company – rather than having your creditors decide for you.
The right option depends on the situation. If your company is yet to become insolvent, but it does not have a viable future, then it will be preferable to file for Member’s Voluntary Liquidation. On the other hand, if you think a rescue strategy is realistic, you should explore the option of examinership. Or, you may be able to negotiate a debt repayment plan with your creditors. This should work to repay the debt, while at the same time keeping your business intact.
If you fail to take action, you could face receivership and/or involuntary liquidation. This can lead to additional consequences for the directors of the company, who may be held personally liable if a company is found to be trading while insolvent.
Directors’ duties during insolvency
The director of a company has various fiduciary and statutory duties. These place certain responsibilities on a director whose company is facing insolvency, one of which is not to engage in reckless trading. Reckless trading is when:
- A director ought to know that the action of the company will cause loss to a creditor, or
- A director was party to contracting a new company debt, which he/she did not honestly believe would be repaid when the debt was due
If a director is found guilty of reckless trading, he/she can be made personally liable for all or part of the company’s debts. This means that as a director, your personal assets are at risk if you fail to manage an insolvency situation correctly.
Business bankruptcy lawyers
No company wants to face insolvency. However, it does happen. What it does, it is better to face the problem head-on. There may be a viable solution that enables the repayment of debt, while at the same time rescuing the business. Even if this cannot be achieved and the company is liquidated, you should do so knowing that you have minimised the damage where possible. As a director, this leaves you confident that you have met your fiduciary and statutory duties.
At Gibson & Associates, we understand that corporate insolvency is stressful. We are highly experienced in this area of the law and can explain the options available to you. Once we have a thorough understanding of you and your business, we can devise a bespoke insolvency strategy that protects the interests of all concerned.