In the unfortunate event that a company has reached the point of insolvency, certain measures must be taken so as to ensure that the creditors owed by said insolvent company are not placed in a position of disadvantage despite the company’s insolvent status.
This particular financial conundrum is solved through a process referred to as liquidation, of which is made possible through the intervention of a government appointed third party so as to ensure that no undue incidents can occur.
However, this liquidation process of the company is brought to a halt in the event that the company cannot be liquidated for the simple reason of a lack of asset values, and as such there are only a few courses of action that the company and its subsequent directors may take in order to rectify this problem.
What is Liquidation?
In the simplest terms, liquidation is the selling of non-cash assets that belong to the insolvent company for the purposes of raising funds so as to pay back creditors, unpaid employees and other parties that are owed monetary sums by the insolvent company.
This is facilitated by the presence of an insolvency practitioner or agent, who will not only ensure that everything being done is legal and above board but also streamline the process, saving both the practitioner and the company itself time and further money.
What are the Factors that are Brought into Fund-less Company Liquidation?
Though liquidation is relatively straightforward when viewed from the outside, several factors are brought into play when the insolvent company has entered this phase of shutting down, with one or two factors preventing the company from becoming liquidated if not fulfilled – especially in the event that the company has no money to use.
This may also work in the favor of the company being closed down, however, as certain situations may mean that the company need not be liquidated in any manner, such as in a lack of debts to their creditor parties.
Remaining Debts
Perhaps the largest factor in whether a company must be liquidated at all, the presence of remaining debts from the company towards other individuals or institutions can make or break the entire situation.
In the event that a company has chosen to no longer retain their functional capacity and also has no money or assets to be liquidated – the presence of debts to creditors can prevent them from legally being able to shut down, with the director and other contributing members of the company being held liable for repaying such debts so as to complete the process.
This can work in reverse, however, as companies with no debts that choose to shut down can instead do so without any sort of liquidation occurring.
Creditors
Though rather uncommon, the sort of creditor party that contributed funds to the growth and function of the company can also be a factor in whether an insolvent company without money is permitted to cease operation without paying their debts.
Such financial institutions like governing bodies, banks and other financially oriented parties are unlikely to forgive a debt, however, and it is advisable for the director of said insolvent company to enter talks with these parties in the event that they are unable to pay their debts.
This may be further facilitated by the appointed insolvency practitioner, as well as other professionals such as financial or corporate lawyers and certified accountants.
Asset Value
If the insolvent company does have assets to be liquidated but the total value of said assets is not enough to cover their debts, certain arrangements may be made so as to soften the blow or allow the company more time to come up with the rest of the funds.
This is highly dependent on the creditors, the nature of the insolvent company’s debts, and how much of the remaining debt in particular can be paid back, with a higher percentage of the insolvent company’s debts being paid equating to more leveraging power for the company.
Personal Funds
In the event that the insolvent company has no assets of value or liquid funds in any manner, individuals appointed by the governing body as well as agents of the creditor companies may hold the director and related officers of the insolvent company personally responsible for paying its debts.
This can be done through the seizure of the director’s personal assets, freezing of their local bank accounts and even direct financial intervention in the director’s funds by said appointed governing agents.
In order to avoid this from occurring, it is best for the director to establish direct lines of communication with the insolvent company’s creditors, any governing bodies involved, as well as their appointed insolvency practitioner themselves.
Insolvency Practitioner / Agent and their Fees
Insolvency practitioners or insolvency agents are individuals appointed so as to facilitate and secure the processes involved in the insolvency of a company. Such a complex and specialized task will often require an individual with some level of education and training in such matters, of which must be compensated for with monetary value.
As such, another factor that is brought into the liquidation of a company that is otherwise unable to pay their debts is the fact that the appointed insolvency practitioner themselves must also be paid by said insolvent company.
It is unlikely that insolvency procedures will take place without the insolvency practitioner being reassured of their subsequent compensation after the proceedings have taken place, and as such this alone can also bring the liquidation of the company to a halt.
Is Liquidation Possible Without Personal Funds and Company Assets?
Though liquidation is the primary method of how a company that has reached insolvency can pay back their creditors, in the event that the company’s assets are not of sufficient value, the personal funds of the company’s director and related individual’s funds may be used instead.
This is not always possible, however, as there are also cases wherein both the company’s director and the insolvent company itself are both unable to produce sufficient funds.
As such, the appointed insolvency practitioner and governing body will prevent the company from completely dissolving and take appropriate measures against the company’s executive members, though this is mostly done in the worst-case scenario.
In short – no, liquidation and dissolution of an insolvent company without assets or a director with available personal funds is otherwise unlikely.
Director’s Redundancy and Liquidation Funding
One possible route an insolvent company’s director may take when procuring funds to pay back their creditors is to place a claim for director’s redundancy with the National Insurance Fund body.
The specifics of this claim, how much the director will receive, and whether the director themselves qualifies in any capacity can depend on a number of factors – and as such is not entirely guaranteed, even if the insolvent company has rendered the director’s position redundant.
It is advisable for the director to make every attempt to file this particular claim, however, as there are few other recourses available to them in the event that they do not wish to utilize their own personal assets and funds to resolve their company’s insolvency issues.
Voluntary Liquidation of Company
The concept of voluntary company liquidation is distinct from that which is enforced by the creditor parties of the insolvent company, with a company entering voluntary liquidation by the agreement of the director and shareholders of said company.
This can save the company and its directors significant amounts of money as such things like court fees and creditor intermediaries are not needed, as well as the fact that voluntary liquidation of the company can be seen as a gesture of honest intentions towards said creditor parties.
An appointed and licensed insolvency practitioner must still be present during the voluntary liquidation meeting, however, as it is their duty to ensure the safety and legality of such processes occurring therein.
Endnotes
In summary, though a company under insolvency has several courses of action so as to repay their debts to creditor parties, this rather precarious position is difficult without an appropriate amount of money under the control of said insolvent company.
In general, most companies that find themselves in this unfortunate situation simply cannot be liquidated without drastic measures being taken, either by the creditors and their agents or the governing bodies overseeing such processes.
It is of absolute importance for the insolvent company’s director or directors to exhaust every possible avenue they can in these particular circumstances.
References
1. Levratto, N. From failure to corporate bankruptcy: a review. J Innov Entrep 2, 20 (2013). https://doi.org/10.1186/2192-5372-2-20
2. Hall, Graham, and Barbara Young. “Factors Associated with Insolvency amongst Small Firms.” International Small Business Journal, vol. 9, no. 2, Jan. 1991, pp. 54–63, doi:10.1177/026624269100900204.
3. Gennaro A. Insolvency Risk and Value Maximization: A Convergence between Financial Management and Risk Management. Risks. 2021; 9(6):105. https://doi.org/10.3390/risks9060105
