Insolvency
Corporate insolvency is the circumstance where a corporation, that is to say a public limited company or private limited company, is unable to pay its debts as they fall due.
Bankruptcy is personal insolvency. If a person is unable to pay debts to at least £750.00 then they may be made bankrupt. If you receive a statutory demand then you must respond within 18 days, so contact us straight away.
As with individual bankruptcy, the Courts step in to organise affairs so as to enable creditors to be treated fairly and equally according to the value of the respective debt and to the extent that is possible. However the procedures are different.
1. Statutory Demand
Both in the case of individual and corporate insolvency the process may be started by a Creditor's Statutory Demand, requiring payment of the debt. This is a very cheap and often effective remedy in its own right in securing recovery of the funds due from the Debtor. However the implication of a Statutory Demand in the case of an individual insolvency is different from that in the case of corporate insolvency. There is no procedure in a corporate insolvency "to have a Statutory Demand set aside". The only way that an equivalent facility can be secured is by obtaining from the Creditor an undertaking not to petition for the winding up of the company on the basis of the Statutory Demand in question. In the absence of such an assurance, a Debtor who seeks to prevent the company being wound up on the grounds of the service of the Statutory Demand must seek an Order from the Court providing a mandatory injunction upon the Creditor preventing the Creditor from issuing a petition. Needless to say, the costs of such a procedure can be quite heavy and securing an undertaking is therefore usually reasonably freely offered where it is self evident that the Statutory Demand should not have been served. The usual reason for disputing the validity of a Statutory Demand is that the debt is disputed.
2. Bankruptcy petition
If the statutory demand is not met then the creditor may petition for bankruptcy.
3. Winding up Petition
It is not necessary to serve a Statutory Demand although it is wise to do so. If, however, a Creditor believes that the Debtor is unable to pay its debts as they fall due, which can be deemed to be the case by a failure to respond to a Statutory Demand, a Petition to wind up the company can be presented in the Companies Court. The Companies Court will within Greater London be the High Court of Justice; but will be the County Court elsewhere. There is a relatively standard form of wording but it nevertheless needs to be accurate and correct because it is possible to have a Petition thrown out, at the cost of the Petitioning Creditor, if the details are not correct.
4. Publicity
A Petition must be advertised in an appropriate newspaper or publication. The usual publication is the London Gazette but it can also be included in a local or national newspaper.
5. Service
Service of the Petitioner will usually be on the registered office if a company, or personally on the debtor if it is a bankruptcy petition. Both the content of the Petition and the fact of service is usually supported by a witness statement/affidavit.
6. What Happens on the Petition Being Heard?
The Court can either dismiss the Petition, adjourn the Petition or grant the Petition and in any event can impose conditions and/or orders for costs against one or more parties.
7. What are the consequences of a Bankruptcy Order
Once a bankruptcy order is made, all the bankrupt’s assets and liabilities become the responsibility of the Official Receiver and they may move to a Trustee in Bankruptcy.
8. What Are the Consequences of an Order for Winding Up?
In the first instance the Official Receiver, a government official, will take over the administration of the company from the directors. In due course a Liquidator will be appointed with the approval of the creditors. A Liquidator is a licensed insolvency practitioner, often, but not always, an accountant. The job of both the Official Receiver and the Liquidator, if the latter is appointed, is to get in the assets of the company and realise the same, and to the extent possible, pay the creditors.
9. Payment of Creditors' Claim
Creditors fall into three types and their claims are dealt with accordingly:-
Firstly there is the secured creditor who will usually look to the assets
that have been secured, rather than to the process of insolvency in recovering
the debt. Until the assets that have been secured have been realised to
produce the cash to pay off the secured creditor, all other creditors will
have no effective right on those assets.
Secondly there are preferential creditors, which at the moment comprise the Inland Revenue for certain elements of tax debt particularly PAYE, H M Custom & Excise for Value Added Tax and certain employees' rights. However, shortly both the Inland Revenue and H M Customs & Excise will cease to have the status of preferential creditors. Preferential creditors have the right to have their debts paid before ordinary creditors from assets of the company that are not secured.
Ordinary creditors have the debts paid proportionately in value to the debt owed to each creditor, after secured and preferential creditors have been paid.
Trade creditors come before "internal" creditors in the sense of shareholders who are the last in line for payment. Liquidators, the Official Receiver and the Petitioning Creditor are entitled to have their costs paid in the first instance before any other creditors, out of unsecured assets of the company.
10. Other duties of the Official Receiver/Liquidator
There is a duty upon the Official Receiver and/or the Liquidator to consider and if need be take steps for a prosecution against any defaulting director under the duties of directors in relation to an insolvency. Basically this will revolve around whether the directors have permitted the company to trade notwithstanding it being in an insolvent state. The most serious of the offences in this regard is fraudulent trading where the directors no full well what they are doing; the less serious offence is wrongful trading where the directors may have not appreciated (but should have appreciated) that the company was insolvent. Another power is to bar directors taking office as directors.
The most important point about corporate insolvency is that the directors may become personally liable on the debts, if they have not complied with their duties. Crossmans MTA can provide a comprehensive and effective service to advise company directors when they may think they are potentially in difficulty in this area, before such difficulties arise.