The liquidation of a company doesn’t always have to be a traumatic event. There are many reasons why a decision may be taken to close down a company and, as long as it has enough assets to pay all creditors in full, this can be done in an orderly fashion through a solvent liquidation. However, occasionally this procedure goes wrong, and the liquidator is forced to convert the process to an insolvent liquidation. This can have serious consequences.
Solvent and Insolvent Liquidations
If the owner or directors of a company don’t want it to continue, they can apply for a liquidation. Perhaps the owner is retiring and doesn’t want to sell the business or pass it on, or maybe changes in business model make it preferable to start a new company.
As long as the company has enough assets to cover all money owed, it can apply for a solvent liquidation. This will mean that the company can be closed down in a professional and orderly way, and the shareholders won’t be saddled with a large tax burden.
However, if a company is in a position where it can’t cover all its debts, then it may be subject to an insolvent liquidation. The application for this may come from one or more of the creditors and will involve all assets being divided between the creditors in proportions the liquidator considers fair.
When a Solvent Liquidation Can Change to an Insolvent Liquidation
When an application is made for a solvent liquidation, at least one Director will need to swear an oath that the company is in a position to cover everything owed to creditors. However, occasionally the situation can change. Perhaps an extra creditor emerges that the director believed was dealt with, or maybe a claim was in dispute or is the result of a long-term warranty that hadn’t been foreseen.
If the liquidator concludes that this leaves the company unable to meet its liabilities, they’ll advise the company that the liquidation must be changed to an insolvent one. This will mean, of course, that no money will be left for the shareholders, but it could also have serious implications for the Director involved.
The Consequences for Directors
When the application is made for a solvent liquidation, a Director will need to swear an oath that the company has sufficient assets. If this is later proven not to be true, the Director could be disqualified from acting as a director in future, and there may also be a fine or prison sentence involved.
This will obviously depend on the circumstances. If the liquidator is satisfied that the Director couldn’t possibly have known about the extra liabilities, there are unlikely to be consequences, but in most such cases some level of negligence will be found, at the very least.
It’s important for everyone that a liquidation is properly presented. If you’re considering a solvent liquidation, I can point you in the direction of an expert who can help you. On the other hand, if you feel a company that owes you money is ignoring your claim in a solvent liquidation, then give me a call to discuss how I can help you get what you’re owed.