insolvency Archives - Milton and Cross

Company Liquidation – Pros and Cons

Posted on July 23, 2021July 28, 2021 by admin in Capital, corporate finance, Corporate Governance, corruption, Development, insolvency, investment advisory, Personal Finance, Police and Security

On one hand, company liquidation definitely comes with some advantages, especially when it comes to your current situation.

Leases are cancelled

Terms on lease and hire purchase agreements are generally terminated at the date of liquidation, meaning that no further payments need to be made. If any arrears are owed, the company leasing the goods may be able to claim from the insolvency practitioners along with other creditors. It is worth noting here that personal guarantees are often given upon signing a property lease agreement; you should check your documentation carefully so you know whether you are likely to be made personally responsible for the remainder of the lease.

Avoid court processes

By voluntarily choosing to liquidate the company, you can avoid being petitioned through the courts and be able to demonstrate to the public that liquidation was a company choice rather than a result of hostile creditor action.

Staff can claim redundancy pay

Members of staff will be made redundant by the liquidator, and if eligible, they can start their claim for redundancy pay and other statutory entitlements. If monies realized from the sale of company assets are not sufficient to cover redundancy payments, staff have an alternative route by which to claim what is owed. The National Insurance Trust Fund(NSITF) pays out for redundancy, unpaid wages and holiday pay should the company not be able to do so using its own funds.

Legal action is halted

Any legal action against the company is stopped when the company is in liquidation. Again, as long as you have no personal liability for a company debt, creditors will be unable to take action against you.

Having identified some of the advantages of this type of liquidation, let us now look at the main disadvantages of the process.

Personal liability for debts

Becoming personally liable for company debts can happen if a director has made a personal guarantee against debts of the business. A creditor can enforce the debt if they are unable to reach an agreement for repayment.

If it comes to light that the company has been liquidated quickly, with the sole purpose of avoiding debt repayment, directors may be held personally liable for company debts due to their improper actions.

All assets will be sold

All existing assets will be sold off in order to provide a dividend to creditors where possible, and for the insolvency practitioner to collect their fee.

Staff will be made redundant

As liquidation bring about the end of a company, any staff employed by the business will be made redundant and be forced to look for employment elsewhere. However, depending on their length of service with the business, they may be able to claim statutory redundancy pay following their dismissal.

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A History of Insolvency Law

Posted on March 5, 2018 by admin in Capital, corporate finance, Development, insolvency, International Investment, investment advisory, mergers and acquisitions, Uncategorized

Early insolvency law was dominated by punitive approaches and it was not until the early eighteenth century that notions of rehabilitation gained force. Insolvency was seen as an offence little less criminal than a felony and was punishable by detention in person at the creditor’s pleasure in debtors prisons. The prevalent view was that it was not justifiable for any person other than a trader to ‘encumber himself with debts of any considerable value’

Prior to this revolution, common law offered no collective procedure for administering an insolvent’s estate. A creditor could seize either the body of a debtor or his effects – but not both. Creditors, moreover, had to act individually, there being no machinery for sharing expenses.

The idea that creditors might act collectively was recognised in 1542 with the enactment of the first English Bankruptcy Act which dealt with absconding debtors and empowered any aggrieved party to seize the debtor’s property, sell it and distribute the proceeds among other creditors ‘according to the quantity of their debts.

During the 19th century, attitudes towards trade credit and risk of default changed. This was due to the rise of joint stock companies and the resulting de-personalisation of business and credit.

The key statute was the Joint Stock Companies Act 1844 which established the company as a distinct legal entity, although it retained unlimited liability for the shareholders. the modern limited liability company emerged in 1855, to be followed seven years later by the first modern company law statute containing detailed winding-up provisions.

The House of Lords in Salomon’s case confirmed that a duly formed company was a separate legal person from its members and that consequently even a one-man company’s debts were self contained and distinct. However, every insolvent business went into liquidation or receivership automatically. It was the kiss of death for them and the creator of unemployment.

An insolvency system was later created to administer the range of new procedures be introduced as alternatives to outright bankruptcy or winding up, which would deal with individual cases on their merits. These involved recommendations that private insolvency practitioners should be professionally regulated to ensure adequate standards of competence and integrity; that creditors be given a greater voice in the choice of the liquidator; and that new penalties and constraints be placed on errant directors. This represented a movement towards stricter control of errant directors but also in favour of an increasing emphasis on rehabilitation of the company.

The rationale behind the culture of business rescues was expressed by Sir Kenneth Cork as follows: “When a business becomes insolvent it provides an occasion for a change of ownership from incompetent hands to people who not only have the wherewithal but also hopefully the competence, the imagination and the energy to save the business”.

The current attitude towards insolvency is to carry out much more work on corporate problems before any insolvency procedure is entered into. This places a new emphasis on managing insolvency risks proactively rather than after troubles have become crises.

In this series, we will explore the life cycle of insolvency from financial distress and default, to corporate failure and business rescue. We will also investigate different approaches to managing insolvency, along with their strengths and weaknesses.

WHEN IS A COMPANY INSOLVENT?

Posted on February 26, 2018 by admin in Capital, Compliance, Corporate Governance, insolvency, International Investment, Small Businesses

Corporate insolvency law is not merely concerned with the death and burial of companies. Important issues are whether corporate difficulties should be treated as terminal and whether it is feasible to mount rescue operations.

WHAT DOES INSOLVENCY MEAN?

Insolvency refers to the regulated legal process that ensues upon the bankruptcy of a company. Insolvency procedure registers and prioritizes claims, freezes other legal actions, limits company to business as usual, and tries to establish value from assets.

In a society that facilitates the use of credit by companies, there is a degree of risk that company creditors will suffer because the firm has become unable to pay its debts on the due date.

If a number of creditors were owed money and all pursued the rights and remedies available to them (for example, contractual rights; rights to enforce security interests; rights to set off the debt against other obligations; proceedings for delivery, foreclosure or sale), a chaotic race to protect interests would take place and this might produce inefficiencies and unfairness. This is what insolvency laws seek to prevent.

The end target of any restructuring or insolvency process is to return a company to financial health. Predominantly by lowering and decreasing its obligations. If the situation can’t be rectified, insolvency law will work to ensure a fair allocation of liquidated assets.

WHEN IS A COMPANY INSOLVENT?

There are two definitions of Insolvency, depending on the test applied by the court. Briggs J in Re Cheyne Finance Plc contrasted “a momentary inability to pay as a result of temporary liquidity soon to be remedied” with “an endemic shortage of working capital” which renders “a company insolvent, even though it may be able to pay its debts for the next few days, weeks or months before an inevitable failure.”

A company is balance sheet insolvent where the company’s liabilities exceed its assets.

A company is cash flow insolvent when the company is unable to pay its mature liabilities as they fall due. In this situation, the company may be balance sheet solvent and is experiencing temporary cash flow/liquidity problems.

Where a company is cashflow insolvent it may undergo restructuring through schemes of arrangement, administration, or receivership and be managed until it returns to profitability.

If the company cannot be returned to profitability, it may be wound up and its assets sold to satisfy creditors claims, after which the company is then liquidated.

Many companies would find themselves without access to funding or credit and may enter unnecessarily into insolvency proceedings if an arbitrary approach was taken to the balance sheet test. For this reason the cash flow test is used to identify companies that merely require a cash injection and those that need to be totally restructured.

In BNY Corporate Trustee Services Ltd v Eurosail-UK 2007-3BL Plc, The court held that the “balance sheet” test of insolvency may only apply where a company has reached a point of no return (where it is clear that the business will not be able to meet its future or contingent liabilities). However, if the cash flow test were the only relevant test for insolvency, then current and short-term creditors would in effect be paid at the expense of creditors to whom liabilities were incurred after the company had reached the point of no return because of an incurable deficiency in its assets.

An insolvency usually begins with an event of default (“EoD”) or inability to meet an agreed business obligation. This obligation may be a contractual debt, a bill payment or a business loan.

A period is sometimes allowed to repair the default (Cure Period); usually between 1 week to 3 months. If the Cure Period lapses or there isn’t one to begin with, the creditor has a right to declare EoD and pursue legal action against the company for the immediate payment of all outstanding obligations.

Final liquidations are a last resort, sometimes the best of both worlds can be achieved by a court approved private work out as creditors generally prefer private negotiation to judicial intervention.

Judicial proceedings are a fall back remedy, used when it is necessary to stay hold out creditors, bind dissentients, improve title, enhance foreign recognition, monitor gross unfairness and punish fraud.

When a corporate failure occurs, this may have a dramatic impact on the lives, interests and employment prospects of a number of parties. It is important to understand the nature of these potential effects. This would help us better manage the negative effects of corporate failure.