How do I know if a company is nearing insolvency?
There are two forms of insolvency, a) a company is unable to pay its debts as they fall due (cashflow test); b) the company’s liabilities are greater than its assets (balance sheet test). With respect to the cash flow test, the most obvious early warning signs are a significant lag on payments to trade creditors and being unable to pay PAYE or GST. With respect to the balance sheet test, the balance sheet will show assets v liabilities. However, thought should be given to whether any goodwill component is relevant and whether the proper value of the assets are reflected in the accounts.
Why would I want to liquidate my company?
As a director, if the company is insolvent and you continue to trade then you run the risk of being personally liable for the debts of the company. Also when the company is insolvent it is often to hard continue to trade as you run out of working capital and can’t get trade supplies etc.
Liquidation means that you hand everything over to the liquidator who then wraps everything up in smooth efficient manner and ensures that all creditors are paid in the correct order.
I have sold my business and there is not enough funds to pay all creditors, what should I do?
After seeking professional advice often, the best course will be to liquidate the company. The liquidator then ensures that the balance of funds are allocated in the correct manner.
I have received a Statutory Demand, what is it?
A statutory demand is a demand for payment of an overdue debt. The debtor has 10 days to dispute the debt, or 15 days to settle it. If not settled after the 15 days the creditor can petition the courts to have the company placed into liquidation. The creditor effectively has one month from the expiration of the statutory demand to petition the courts.
A shareholder can place a company into voluntary liquidation during a statutory demand process but once the company has received notice of proceedings to place the company into liquidation they only have 10 working days to appoint a liquidator of their choice.
Can a director be charged with reckless or insolvent trading?
Reckless or insolvent trading is where a company is traded in a manner likely to create substantial risk of serious loss to creditors. Once a director is aware a company is insolvent, or near insolvency, they must undertake a sober assessment of the company’s prospects. Accordingly, there is a grace period but directors should act during this brief period by taking professional advice which they are entitled to rely on in performance of their duties. If a director takes no steps and fails in their duties then they can be held liable for a portion of the Company's debts.
Where does the money go?
Once a liquidator has realised the assets of the company, and this can often take some time, they will then look to disburse the funds pursuant to Schedule 7 of the Companies Act. In effect this is liquidator’s fees, then preferential staff, IRD core assessments, secured creditors (who have not been satisfied with directly secured assets), then unsecured creditors equally.
What should I do if I am the creditor in a liquidation?
A liquidator will provide a first report to all known creditors. If you do not hear from the liquidator please get in contact. Who the liquidators are, and any published reports will be on the Companies Office website under the company in liquidation. It is important that you complete a creditor claim form and return it to the liquidator.