Published: 5th March 2020
Insolvency proceedings can be started by a single creditor or group of creditors, if the debtor company owes more than £750 and the debt is not disputed. This process is called compulsory liquidation, and generally begins with the issue of a statutory demand against the debtor company, closely followed by a winding-up petition.
Company directors may also decide that voluntary liquidation is the best option if they fear such legal action by creditors is imminent. Directors often feel there is no escape from their company’s debt situation, and decide to begin liquidation proceedings with the support of shareholders.
This is called Creditors’ Voluntary Liquidation (CVL), and is a process that holds benefits for both directors and company creditors.
If a creditor issues a 21-day statutory demand, it is a strong indicator that compulsory liquidation is looming. This document is a written order to repay the amount owed within 21 days.
Non-payment, or failing to respond in time, makes the debt official and allows the creditor(s) to petition for the company’s winding-up. Once a winding-up order has been granted by the courts, it marks the end for the company.
Begbies Traynor specialises in helping businesses with severe debt problems. We can offer professional guidance if you have received a 21-day statutory demand, and are unsure of the best way forward.
What criteria must creditors meet prior to starting insolvency proceedings?
It is worth noting that HMRC often use statutory demands as a way to quickly close down companies that are delinquent on tax. Because a court order is not required for a statutory demand, compulsory liquidation proceedings can be started quickly to recover their monies.
A statutory demand may be received directly from a creditor who has access to the correct forms online, or sometimes via their solicitor. Being in receipt means that unless directors take immediate aversive action, their company will be wound-up.
If a company is unable to recover from its debt situation, it can be beneficial for both directors and creditors to start insolvency proceedings themselves via a Creditors’ Voluntary Liquidation, or CVL.
This is a formal insolvency route requiring the input of licensed insolvency practitioners (IPs). The potential benefits for directors include a reduced likelihood of accusations of wrongful trading and unfit conduct.
By entering a CVL, creditor interests are put to the fore and their chances of receiving a higher return increased.
It is often the case that companies find themselves in an uncontrollable debt situation, and decide to prevent any further losses by instigating insolvency proceedings. It is a duty in directorship to place creditor interests first when insolvency occurs, and by starting proceedings for company wind-up they also minimise their own exposure to personal liability.
If the appointed IP finds reason to question the conduct of any director in the time leading up to insolvency, they are obliged to send a report to the Secretary of State. This can result in further investigations, and potentially in the disqualification of directors for up to 15 years.
Begbies Traynor has vast experience of helping companies in distress, and operates from a network of offices around the UK. We can arrange a same-day consultation to discuss your situation, outlining the insolvency routes available with a view to identifying the best option.