Companies

A Limited Company is a separate legal entity from its shareholders or owners. Shareholders and directors are not responsible for their company’s debts unless they have provided personal guarantees. However, with most small companies, directors do provide personal guarantees and where a limited company is in severe financial difficulties, its owners and directors are often also in financial trouble. Directors of limited companies also have particular legal responsibilities when their companies are in severe financial difficulties.

In this section we will look at the solutions available for companies in financial stress and director’s responsibilities, while the individual owners’ solutions can be found in the Individuals section.

Sole traders or partnerships

If a sole trader or partnership business is in financial difficulties the problem must be overcome personally by the individuals or partners who own the business, because they and the business are legally the same entity. In other words, sole traders or partners are personally responsible for their business’s debts (and an individual partner could be liable for all other partners’ debts as well!). The debt solutions available for sole traders and partnership business owners in financial difficulty can be found in the Individuals section.

Limited companies

The directors of a limited company that has severe financial difficulties have, broadly, three options:

1. They can fix the company’s trading and financial problems, or
2. Enter into a Company Voluntary Arrangement with the company’s creditors, or
3. Put the company into administration, administrative receivership, or liquidation.

1. Corporate Recovery (or Corporate Rescue)

The aim of corporate recovery is to solve the company’s financial difficulties through improving its trading situation without entering into a formal arrangement with creditors, or putting the company into liquidation. Corporate rescue usually involves some form of informal arrangement with creditors on the timing of debt payments.

More information on our work in corporate recovery can be found here.

2. Administration

Administration is a cost-effective way of ensuring that a business in financial difficulties can still trade. Once an Administration Order is in place, creditors’ rights are frozen and they cannot pursue old debts. The company could now trade under the control of the Administrator with the directors only having the powers delegated to them. Often an Administration Order is used to protect the company while a Company Voluntary Arrangement is considered and proposed to creditors.

3. Company Voluntary Arrangement (CVA)

A CVA is where a debtor company enters into a formal, legally binding arrangement or composition with its creditors to avoid being wound up. The company, working with an Insolvency Practitioner, proposes a scheme to creditors that maximises creditor returns while enabling the company to continue trading. Typically, a CVA will last three to five years after which, if all payments have been met, the balance of the company’s debts will be written off.

The advantages of a CVA are:

• It is not advertised
• It is a private agreement between the company and its creditors only that allows the directors to remain in control of the business
• It can to tailored to the circumstances of the company, giving the opportunity for the company and its creditors to reach a reasonable and binding outcome

4. Formal insolvency arrangements

Should an informal corporate rescue strategy not be successful, or should a Company Voluntary Arrangement not be viable, (or should creditors reject the company’s offer of a CVA), the director’s options could be limited to putting the company onto liquidation or administrative receivership.

• Liquidation
  A Creditors’ Voluntary Liquidation is instigated by the directors/shareholders of the company. The company will now cease to trade and the liquidator will sell its assets. Purchasers could include the directors/shareholders of the company, who can now form a new company. Directors are not liable for the debts of the old company unless they had given personal guarantees. A liquidation of a company could be appropriate whether or not the company is technically insolvent.
• Administrative Receivership A Receivership arises where a secured creditor (usually a bank or a finance company) appoints a receiver to secure the assets of a company to recover its loan. The receiver, who is now the agent of the company, will probably sell company assets to recover its loan, but has the ability to continue to trade depending on the circumstances. It is more usual that following a receivership that the company would go into liquidation.

5. Director’s responsibilities

Company directors have onerous personal responsibilities and duties conferred by common law and statute. Particular liabilities can arise when their companies get into financial difficulties. These include:

• Fraudulent trading, which arises when a company intentionally defrauds its creditors, and
• Wrongful trading, which arises where a company goes into insolvent liquidation and the directors did not take all possible steps to minimise the loss to creditors.

Few actions of fraudulent trading have succeeded because of the difficulty of proving dishonest intent. If wrongful trading is proved, the court will require a financial contribution from directors. Generally, a director who acts honestly and conscientiously has nothing to fear.