Insolvency is where a company is no longer able of pay its debts. When a company becomes insolvent there are a number of options available – receivership, liquidation or examinership. Liquidation is when the company ends and its assets are sold with the proceeds of sale used to pay off the creditors. The members will receive the balance after the costs and expenses of the liquidation have been paid. There are different types of liquidations including Creditors’ Liquidation, Compulsory Liquidation and a Members’ Liquidation. In today’s article I will discuss Creditors’ Liquidation with you.
Creditors’ Voluntary Winding Up
A creditors’ voluntary winding up involves the creditors (those who are owed money) of a company appointing a liquidator. A creditors’ voluntary winding up can arise in a number of ways. If a company is insolvent the members of the company can hold a meeting and pass an ordinary resolution for the winding up of the company. The members will appoint a liquidator and they will call a meeting of the creditors of the company on the same day or the day after their meeting. The company must publish notice of this creditor’s meeting in newspapers before the meeting taking place. At the creditor’s meeting they are informed of the position of the company and receive a statement of the accounts and liabilities of the company.
The creditors can agree with the liquidator appointed by the members or they can appoint their own liquidator. Once the creditors appoint the liquidator, and s/he consents, the winding up then becomes known as a creditors’ winding up. The creditors may also then appoint a Committee of Inspection whose purpose is to monitor the winding up and to decide the remuneration of the liquidator, which includes his costs, fees and expenses. The Committee of inspection is made up of nominees of both the creditors and the members. The liquidator will call various meetings of the members and creditors throughout the winding up of the company and present accounts of the company at these meetings. The company is considered to be dissolved within three months of the final accounts being presented to the Registrar of Companies.
A creditors’ voluntary winding up can also arise when liquidation begins as a members’ winding up. A members’ winding up comes about when both the members and the directors pass a resolution that the company is to be wound up. The directors must make a Statutory Declaration of Solvency where they state that the company is solvent and will be able to pay its debts within twelve months from the commencement of the winding up. This winding up becomes a creditors’ voluntary winding up when one fifth of the creditors (in number or value) apply to the Court to have the members winding up converted into a creditors winding up. The Court will grant this Order if it is satisfied that the company is unlikely to pay its debts within the time specified in the Declaration of Solvency.
The end result of this process is that the company no longer exits. The main areas of concern for the directors are where a Liquidator forms the opinion that the Directors acted dishonestly or recklessly. If this happens the Directors can be fixed with personal responsibility for the debts or the can be prevented from acting as Directors for a period of years. This is an area that needs to be at the forefront of peoples’ minds when they are operating the current climate where there is a very fine line between staying in business successfully or continuing to trade with the risk of exposing yourself to personal liability.
The loss of corporate protection is a very serious worry for someone who is fighting for survival!
