Insolvency related legal tips including company administration

When is a company considered insolvent ? This is not an easy question to answer.  However, the law states that a company is insolvent when it can no longer afford to pay its debts or when the company’s total liabilities are greater than its assets. It is important to keep accurate recordings in order to

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When is a company considered insolvent ?

Debbie Serota – Partner & commercial solicitor

This is not an easy question to answer.  However, the law states that a company is insolvent when it can no longer afford to pay its debts or when the company’s total liabilities are greater than its assets. It is important to keep accurate recordings in order to avoid trading insolvently.

How do the directors duties change when a company becomes insolvent ?

If a company becomes insolvent, the directors will be under a duty to protect the interests of the creditors rather than the shareholders as is the case during the normal course of trading.  An insolvent company must be run with the intention of getting the best returns for the creditors.

Tips to avoid insolvency

Business plan

Incorporate a business plan into your organisation and review it frequently. It should specify the aims of the business and identify ways of achieving the goals.

Control your business

Establish your financial situation up to date and estimate account for the next year.

What is your market?

Find the best marketplace for your products or services. Ensure that they have competitive prices and are distinguishable from the other products.

Ascertain your risks

Use different suppliers and obtain credit insurance if a customer fails to pay for your product or service.

Concentrate on your turnover and cashflow

Put credit control procedures in place, specifying how to resolve the problems and check your new customers

  • Employ external debt collectors
  • Check all customer credit limits regularly

Different supplies of funding

Consider asset-based lending and invoice discounting

Retention of Title

If appropriate, a retention of title (RoT) clause should be included in your trading agreement. This will allow you to claim the goods if the customer becomes insolvent.

Insolvent customer

The appointed insolvency practitioner should be informed as soon as the problem occurs to maximise the money you are owned.

Unexpected situations

Get legal advice as soon as someone from within the organisation dies or gets divorced to avoid business problems. also, expect the unexpected, have a plan “b” and set aside resources and cash if possible for contingencies and unforeseen problems.

Take legal advice at the earliest opportunity

Why are companies placed into administration ?

  • They cannot pay their debts as they are due.
  • Every company in Administration is guarded by moratorium. This means that no legal action can be taken against the company. The company is protected from its creditors while a debt restructuring plan is being prepared.
  • The Enterprise Act 2002 (“EA”) states that the purpose of Administration is to support recovery of companies and not winding them up.

What is the role of an administrator ?

An Administrator is an officer of the court and his roles and duties include:

  •  entering into contacts on behalf of the company in order to rescue the company
  •  taking care of the daily business management
  •  achieving greater results; if this cannot be done the Administrator is authorised to sell the property in order   to pay the secured and preferential creditors
  • presenting the proposal to the creditors and stating why it has not been achieved
  • the appointment is for one year but may longer with the consent of creditors or the court.
commercial law • Debbie Serota

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