When a company is unable to pay its debts as they fall due, a director’s duties shift from the management of the company for the benefit of the shareholders, to ensuring the company’s creditors are not disadvantaged by the company continuing to trade.
The directors should seek and comply with professional advice from their auditors and solicitors regarding any decision to continue trading for an interim period.
If the directors conclude that the company does not have a reasonable prospect of survival by continuing to trade, they are obliged to wind up the company by putting it into liquidation. This process is called a “Creditors Voluntary Liquidation”.
A summary of the process is as follows:
- The directors commence the process by calling a meeting of the Board to discuss the financial difficulties facing the company and its inability to continue to trade. It is resolved that the liquidation process is commenced and a meeting of the shareholders be called.
- The directors call a shareholder’s meeting setting out the company’s financial difficulties and proposing that a resolution be passed to wind up the company and a nominated party be appointed liquidator to the company. There are strict advertisement rules in relation to the meeting.
- The directors must also convene a creditors meeting whereby all the creditors of the company are invited to a neutral location (usually a local hotel) to discuss the company’s insolvency. The creditors are provided with a Director’s Statement of Affairs of the Company in advance, together with a schedule of the company’s creditors. There will be a discussion on the Statement and any queries on it at the meeting.
- The creditors have the option to nominate their own liquidator in place of the company’s nominee and a vote is taken. When a liquidator is appointed, there are a number of statutory notices to be published and filed.
- The directors’ executive control of the company passes to the liquidator but they are legally obliged to assist the liquidator for the duration of the liquidation.
The procedure for a Creditors’ Voluntary Liquidation is prescribed in the 2014 Companies Act and strict adherence to the statutory framework is required.