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I'm a director of an insolvent company, what are the options?

A director of any company owes duties to shareholders, employees, creditors and also has personal liability.  In these troubled times a director needs to know when a company is on the brink of insolvency and what his or her options are.  

Based on our experience of advising directors facing trading dilemmas we have summarised the basic options for a director to consider. 

Key issues are:

  • Is the company insolvent - the test
  • Liquidation
  • Administration
  • Receivership

  • Company voluntary arrangements

Is my company insolvent?  

A company is insolvent if:   

  • - it cannot pay its debts as they fall due for payment; or
  • - the value of its liabilities exceeds the value of its assets.    

Options available to an insolvent company under UK company law:  

1. Liquidation   

This is the where the assets of the company are placed under the control of a liquidator.  Generally a company in liquidation will cease to trade and the liquidator sells the company's assets and distributes the proceeds to the company's creditors.

 

2. Administration   

This involves an administrator taking over the management of the company's trading and affairs and the company is protected from creditors enforcing their debts.  The administrator's role is to run the company with the aim of reorganising it or selling some or all of its business and assets.   

You can sometimes have a pre-pack whereby the deal to sell the company's business and assets is struck before the appointment of the administrator and completed immediately on appointment.

 

3. Receivership   

Someone with a charge over the company's assets (for example a bank) may appoint a receiver to sell the assets in question and pay the proceeds to the charge-holder to satisfy the secured debt.

 

4. Company Voluntary Arrangements    

Also known as a CVA, this is where a company and its creditor enter into an agreement pursuant to which the company compromises its debts or agrees an arrangement for their discharge.  The CVA will bind all creditors (excluding those with security over the assets of the company) when the necessary majority of creditors approve the CVA at a creditors' meeting.

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