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The Legal Ramifications of Winding Up a Company With Debts
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On 28 March 2020, the Government announced new insolvency measures to support businesses under pressure as a result of the coronavirus outbreak. The Government will amend insolvency law to give companies breathing space and keep trading while they explore options for rescue and temporarily suspending wrongful trading provisions retrospectively from 1 March 2020 for three months. You can find out more here. Directors must still be mindful of their fiduciary duty to creditors and shareholders and early advice is always the best protection against any criticism.
Deciding whether or not to wind up a failing company can be a difficult decision, especially when you’re concerned about the legal ramifications and hassle involved when winding up a company with debts. You may be wondering if it is possible to be held personally liable for company debts, or whether you could be accused of wrongful trading by closing a company that still has debts. Who pays the debts if they are dissolved?
Fortunately, the directors of a limited company are not held personally liable for the company’s debts, so it could be liquidated and dissolved without affecting the personal credit or finances of the directors. However, there are uncommon scenarios in which directors are held personally liable if it is shown that they’re guilty of wrongful trading.
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When a board of directors decides to enter voluntary liquidation and dissolve a company that is indebted they must do so carefully, as the liquidator will be performing a post-liquidation investigation to determine whether any directors were guilty of wrongful trading or other misconduct. If found guilty a director could be banned from acting as the director of any limited company for a period of up to 15 years, and they may also face hefty financial penalties.
The best way to avoid all this hassle is to consult with an insolvency practitioner and enter liquidation voluntarily, instead of waiting for a creditor to wind up your company through a compulsory liquidation ordered by the court.
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In every formal procedure the insolvency practitioner is obligated to take the interest of the creditors into consideration. Therefore, an insolvency practitioner cannot legally dissolve a company without first ascertaining whether this action would provide the most favourable outcome for creditors.
All that this means is we must, based on our expert opinion, determine that the company is not going to be able to meet its obligations in the future.
By liquidating the company outright the insolvency practitioner maybe able to repay creditors with the proceeds while dissolving the remainder of the debt and the business itself.
If creditors have already filed legal actions against your company, and you’re attempting to liquidate voluntarily, the court may consider forcing the company into compulsory liquidation instead.. This would still end in the dissolution of your company, except the liquidation would be carried about by a court or creditor-appointed liquidator, rather than an insolvency practitioner chosen by your board of directors.
For this reason, it is always preferable to enter administration voluntarily rather than wait to be wound up forcefully by creditors. However, even if a creditor has already filed a petition to put your company into receivership, administration, or liquidation, it may still be possible for you to postpone these actions by entering into a company administration voluntarily.
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If you’re concerned about the legal ramifications of winding up a company with debt, feel free to call us for a free consultation. We’ll help you understand what to expect when winding up your company, and offer our advice on whether you should consider other options as well.
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