Are you operating a small business via a limited company? Is your company profitable or is it losing money steadily? Are prospects for business good or is there no hope for the business? Can the business be saved? Whether you are male or female, a publican, a butcher, a shopkeeper, a barber, a draper, a coal merchant, a small manufacturer or assembler of products, a farmer, a fisherman, a building contractor, a beauty therapist, a hairdresser, a masseuse, a printer, a courier, a taxi driver or whatever, so long as your business is incorporated as a limited company, you should know the answers to the questions posed above.
If you don’t know how the business is going then perhaps you should find out or perhaps you should get out. To continue trading while your business is insolvent is a serious matter and could lead to sanctions being applied to you personally. Assuming that you are an owner/director and perhaps also an employee of such a firm the first question to be addressed is whether your business is insolvent or not. If you can answer yes to the two questions below then your company is solvent. If you must answer no to both questions then your company is insolvent. If your answers include a yes and a no or a maybe, then the solvency of your company is in doubt, and you need to quickly determine the matter one way or the other. You may need to obtain professional advice from an accountant or other competent person.
When you have determined the solvency or insolvency of the business, then you need to decide what to do. If the company is solvent you have to decide if you want to continue trading or to cease trading. The usual route that a solvent company uses to do this is a Members’ Voluntary Liquidation.
If on the other hand you determine that the company is insolvent then you must quickly decide what to do about it so as to avoid trading while insolvent. Only an outside party can initiate a Receivership or a Compulsory Liquidation (or Compulsory Winding Up) so these two options are not available to the owner director of a small company. The three choices available which can be initiated by company directors are a Company Voluntary Arrangement (CVA), Administration (ADM) or a Creditors’ Voluntary Liquidation (CVL). The illustration below shows the full range of statutory options available to companies including Members’ Voluntary Liquidation (MVL) which is available for solvent companies which wish to cease trading. The three options for insolvent companies should each be considered in the context of the key variants as listed below and compared and contrasted with the other two options. In doing this, directors of the troubled company can make a more enlightened decision which could perhaps lead to its rescue.
A CVA is perhaps the first option that the directors of the insolvent company should consider in respect of the key variants. The pros and cons in respect of each variant should be identified from the perspective of the various stakeholders. Stakeholders include members, creditors, suppliers, employees and of course the directors themselves. The directors must ensure that they comply with all their legal, regulatory and fiscal responsibilities.
Administration is perhaps the second option that the directors should consider in respect of the key variants, again identifying the pros and cons in respect of each variant from the perspective of each of the stakeholders.
The third option for directors to consider is a CVL and perhaps this is the least attractive for directors in particular given their limited role in the process and considering that the liquidator has significant powers in regard to previous transactions. The liquidator, in his or her investigations into the affairs of the company, must consider whether there have been voidable transactions such as transactions at an under-value and preferences. The liquidator will also consider whether directors are guilty of wrongful or fraudulent trading or of misfeasance and evidence of such may result in the disqualification of directors.
Insolvency law is quite complex in the UK and this is why directors should seek the advice of competent professionals such as suitably qualified accountants or insolvency practitioners if they should suspect that their company is insolvent or is threatened with insolvency. They should also consider taking legal advice in such a scenario.