AABRS on What Corporate Bankruptcy Means to Stakeholders

bankruptWhen one hears the word bankruptcy, one would tend to cringe at the mere thought of it. It’s not surprising given the fact that no entrepreneur would want to put up a company with the end goal of losing and closing shop. But what exactly does bankruptcy entail especially to stakeholders? We’ve gathered answers from the experts over at AABRS. Read about them below.

But before we continue allow us to give you a clear understanding of the terms starting with their definitions.

Stakeholders refer to a person, a group or an organization that has interest or concern in the company. This includes owners, directors, employees, shareholders, creditors and vendors to name a few.

Bankruptcy pertains to the legal proceeding that involves a business that is unable to fulfill its obligations and liabilities to creditors. Such proceeding involves the company having to sell off all of its assets with the proceeds used to repay creditors in full or if not in proportion to their interests. Its completion closes the company and relieves it from the remaining unfulfilled obligations incurred prior to filing for bankruptcy. This should not be confused with insolvency which refers to the state or condition of having more liabilities than assets or more cash outflows than inflows.

When a corporate bankruptcy has taken place, the following is how it will affect the entity’s various stakeholders:

  • Owners/Shareholders – The proceeds of the liquidation of the assets will first provide for creditor interest. Should there be any left then that would be the only time when owners and directors can get their share.
  • Directors/Employees – Cessation of business comes with bankruptcy. The entity will have to close shop and everyone will lose their jobs. We know how bad that sounds but it is what it is.
  • Vendors/Suppliers – With the company closing down, it can affect the operations of its vendors and suppliers. Think about it as a food chain or a domino effect. When you close, all your orders and purchases will be cancelled too and that can be a problem for your suppliers especially if you were a big client.
  • Creditors – Bankruptcy is also bad news for creditors. Although given first priority, there is still a huge chance that they cannot collect in full especially if the sale proceeds could not suffice.
  • General Public – According to AABRS, a company closing down can rock the economy as it will decrease income generation and will leave a huge chunk of individuals unemployed.

5 Things about Creditors’ Voluntary Liquidation You Want to Know

Whether you are a businessman, a budding entrepreneur, a commerce student, an investor or plain right curious, a creditors’ voluntary liquidation is something that you have to know about when it comes to the field and industry of businesses and entrepreneurial ventures.

As we all know, an entity comes to its demise when it can no longer fulfill its obligations as they mature. To avoid it one has to know how insolvency creeps in and what its warnings signs are. AT the same time, it also has to know what recovery options it has in order to stop or at least lessen the negative effects it has on the company.

A Creditors’ Voluntary Liquidation is one of the most common solutions to formally and legally wind down operations. Below are five things about it that you need to know about.

  1. 1.    It is voluntary as the name suggests.
    Unlike a winding up petition, this one is fully voluntary with majority of the directors voting for it. It is important to take note however that insolvency has to be proven beyond reasonable doubt. This will then call for the members to again vote for a licensed insolvency practitioner or liquidator to attend to the procedures.

 

  1. 2.    It calls for the sale of all corporate owned assets.
    All assets owned by the entity shall be sold with its proceeds to be paid out to stakeholders. Owners and directors will not be held personally accountable unless proven to be at intentional fault.
  2. 3.    It necessitates prioritization of creditors.
    The proceeds from the sale of the corporate assets shall be distributed in proportion to the interests of the stakeholders. Priority is first and foremost given to the creditors. Any excess should there be are to be given to shareholders.

  3. 4.    It cancels contracts regarding future services.
    Any contracts with other businesses regarding future services would be made unenforceable given the company’s inability to fulfill them. This is why insolvency has to be validated because no business should use a Creditors’ Voluntary Liquidation in order to avoid and escape from their debts.

  4. 5.     It will cease operations.
    Essentially, once a Creditors’ Voluntary Liquidation has been set in motion, it will formally wind down operations, cease trade and close down the company. It may be a hard pick but then again doing so would be much bearable compared to when a Winding Up Petition in Court would force one to liquidate.

What to Do When Insolvency Signs Flare Up

In the world of business there is this thing we call insolvency which has been referred to as a state wherein an entity can no longer meet its liabilities when they mature or as they fall due. Common warning signs include delayed payments, sudden cost cutting measures, employee layoffs and top management resignations to name a few. Insolvency is a serious thing as it can further lead to liquidations and winding up procedures. Surely, no business would want that as no one works on a business just to see it crashing down. So what measures does one take when such insolvency signs flare up? The team at aabrs.com has here a few useful advices regarding the matter.

warning signsAdvice Number 1: Assess the situation. – How bad is it? How much of the company can be saved or salvaged? You need to assess the gravity of the situation to better be able to address it. After all if you know nothing about the situation then you wouldn’t be able to provide the best solution there is.

Advice Number 2: Take a look at your books and financial records. – Know what brought it up. How it began. Review past data. Look into your financial records and financial statements. This should give you an idea as to when the problem may have began, when it peaked, when it hit plateau and whether or not it is still in progression.

Advice Number 3: Talk to your consultant, advisor, analyst or an industry expert. – It is best to talk to the experts about it. Not everyone has been properly trained with insolvency procedures and recovery options. If you are saving the entity then better do it with the right team.

Advice Number 4: Examine your options and weigh the benefits to the costs. – There are many options and solutions out there. It is imperative that you weigh out the pros and cons properly. If you fail to do so then all efforts may be put in vain. Do these with extreme caution and with carefully studied decisions.

Advice Number 5: Be honest with yourself and the company stakeholders. – Sometimes insolvent entities have come to the end of their lifecycle and hit rock bottom. If this is the case then it is best to be honest. Remember that getting a voluntary liquidation is way better than receiving a winding up petition says the experts at aabrs.com.

The Characteristics that Your Liquidator Must Possess

When it comes to businesses and that point in time when operations have to be wound down and assets liquidated either voluntarily or forced by a court order, a liquidator will be assigned to head and perform the many tasks and responsibilities in the liquidation process. They are also employed by an individual who upon their death is responsible for carrying out the deceased’s wishes and the administration of the succession. On that note, the appointed liquidator should possess a number of vital characteristics.

business-loans-growth-recoverTRUSTWORTHY – First and foremost they have to be honest and trustworthy. In the first place they will take care of selling your assets and distributing its proceeds accordingly in favour of creditors and lastly to owners and shareholders. In short, they will handle money and when money is at stake you need someone you can trust.

TIMELY AND PRUDENT – Liquidations should not take too long. It will both be a pain for the company and to its creditors and stakeholders. Thus to make the process efficient and timely, the professional you get to do the job has to be prudent about deadlines and time.

OBJECTIVE AND FAIR – A liquidator should know his or her objective very well. They too have to be fair in their dealings. They should know how to shun bias and make transactions based on fair judgement and keeping into mind the interest of the parties involved.

TRAINING – This is no child’s play. Training is a must and is very important. Corporate assets are no joke. One has to have the right knowledge not only regarding assets but laws, regulations and processes as well.

EXPERIENCE – As the old adage goes, experience is the best teacher. It makes things easier and less of a hassle for both parties. Getting a knowledgeable and well experienced liquidator is a good plus.

SPECIALIZATION – Like doctors, accountants and lawyers, liquidators too have their specialization. This pertains to the type of industry that the company clients belong too. Some specialize in manufacturing, others in retail and so on and so forth.

PROFESSIONALISM – They too should have efficiency and sensitivity when faced with a difficult situation. Remember that liquidations are most often than not a sad part for business owners. There too might be disputes with creditors. As a liquidator they should keep their professionalism up all the time.

So when looking for your reputable liquidator, keep those important characteristics in mind.

AABRS on Options When Faced With Insolvency

When your business is or might be under a state of insolvency, immediate action should be taken to avoid the worse from happening such as a compulsory liquidation enacted by a court order and brought about by unpaid creditors.

There are essentially two types of insolvency. The first is when the assets of a company are lesser than its liabilities as seen in its financial statements. The second is when the cash inflows are lesser than the outflows and cannot meet the entity’s needs. In either case, there are several options available to businesses and this includes: company voluntary arrangements, pre-packs, administrations and creditor’s voluntary liquidation.

http://www.dreamstime.com/royalty-free-stock-images-scholarship-interview-image28968399OPTION # 1: COMPANY VOLUNTARY ARRANGEMENT (CVA) – This is an agreement entered into by the insolvent entity and its creditors to delay the payment of the matured or maturing debts and therefore replaces or amends the terms in the existing contracts with the creditors.

OPTION # 2: PRE-PACKED ADMINISTRATION – This option centers more on restructuring the business and aims at the business’ going concern. In this situation, the entire business, its assets and liabilities included, are sold to a familiar third party or even a company director. In essence there comes a new management or a new partner. Pre-packs are used to impede a possible insolvency, save the business and bring it back up.

OPTION # 3: ADMINISTRATION PROCEDURE – This one on our list has been referred to as “the breather”. This gives the insolvent organization a period of time by which its creditors cannot take action against it but of course without leave of the court. This happens when there is still a chance for the troubled business to redeem itself, save up, pay its debts and resume operations. During this time, the company is placed under the control of the administrator.

OPTION # 4: CREDITORS’ VOLUNTARY LIQUIDATION – Lastly, the creditors’ voluntary liquidation is when insolvency cannot be stopped any longer and is therefore ascertained after careful study and examination of the transactions and financial statements of the business. A liquidator is appointed to perform the procedures and distribute the proceeds to the appropriate parties with the creditors prioritized over shareholders.

Because insolvency is a very hot and sensitive topic, it has to be dealt with accordingly. Study, examine and investigate which option suits you best. Talk to an expert if you must and let us do well to avoid forced liquidations and its adverse effects.

Winding up petition procedure

When a company owes you more than £750, and after a series of attempts to collect, the company still has not paid you, then you can present a winding up petition at court. Why more than £750? It is because the cost of filing this petition is more than £750 and it will not be reasonable to handle a case in court if the debt incurred is less than the cost to file the petition.

winding up petition at courtRequirements for the petition

First and fore most, the company must owe you more than £750. You need to have proof that the company owes you. Proof that the company failed to pay the debt after several attempts to collect. Then you fill up form 4.2 and a statement of the truth. You need to fill up 3 copies and submit them to the court. And make sure you have all the debtor company’s complete details.

Where to file the petition

You need to find a court that deals with insolvency. Naturally, you need to go to the nearest court where the company registered office. If the company has a paid up share capital of above 120,000 then you need to file the petition to the high court.

Serving the petition

Then you need to serve the petition to the company. You can do this by hiring a process serving firm, or mail it via post or to delivery it to the company’s office.  Then once they have received it you need to send a certificate of personal service to the court where you filed the petition.

The Court Hearing

When the court accepts the petition a date for the hearing will be set. Then 7 days before the hearing, you have to place an ad in the London gazette to let the public know that a winding up petition has been served. You also need to give the court a copy of the London gazette ad and a certificate of compliance to the court. At the hearing date you need to give a list of everyone who will be attending the hearing. Once the hearing is successful, meaning the court has granted your winding up petition, then a liquidator will be appointed. The company will be closed down and the assets will be liquidated. The sales of the assets will be evenly distributed to the creditors.

This is the winding up petition procedure. This is the harshest method of debt collection. This is usually done as the last resort if all other means of collection has failed.

What is a Creditor’s Voluntary Liquidation?

If you belong to the corporate world or in some way concerned with business then you may have already heard of this thing people refer to as a CVL or a Creditors’ Voluntary Liquidation. Such occurs in cases when the directors or members of an insolvent company initiate a meeting with the entity’s creditors and shareholders regarding the winding up of its affairs together with formal business closure. To put it simply, a CVL happens when the company itself chooses to liquidate because it cannot anymore pay its liabilities. Any remaining assets will be sold whose proceeds will be proportionally distributed to the creditors and the company is then dissolved.

business recoveryHere it is important that the solvency or insolvency of the business entity is ascertained and a company may need to find a consultant, adviser or firm like Accura Accountants Business Recovery, who can provide consultation and assessment of the company’s financial position, assets, liabilities and accounting records. This is done to ensure that a Creditors’ Voluntary Liquidation (CVL) is indeed the appropriate action to be taken.

If insolvency has been proven such as the inability to pay off debts with current assets and a CVL is indeed appropriate, the BODs will then pass a resolution that it will cease to carry out its operations. The shareholders too can pass the same resolution by way of nomination. After which a meeting with the shareholders and creditors will be held an insolvency practitioner referred to as the liquidator will then be appointed and will carry out all the winding up affairs of the entity. With that said it is important to know what a liquidator does and needs to possess.

The LIQUIDATOR should first and foremost be a qualified insolvency practitioner and is chosen by the creditors at the meeting stated earlier. He or she is expected and required to take on his or her tasks in good faith and to exercise the powers delegated to him or her for the purposes with which they were given and do so with reasonable care. Their functions and power include the following:

  1. Assessment and collection of the insolvent entity’s assets, realization of their values and sale of the same.
  2. Distribution of asset sell-off proceeds to the entity’s creditors. If the amount is not enough it is to be distributed proportionately but if a surplus occurs it then is distributed to the members.
  3. Continuation of the business affairs only up to the point that is deemed beneficial for the impeding ending up or dissolution.

All About Members’ Voluntary Liquidation from Experts at AABRS

To make you understand better what a member’s voluntary liquidation is, we’ve asked experts from AABRS to explain things. It is the intentional winding up of a business by a solvent company meaning that its assets are still enough to pay off its liabilities. It is simply putting a close to a business officially and because insolvency is not the ground reason for such decision a statutory declaration of solvency is required from the BODs or Board of Directors. It also has to be approved and validated by shareholder votes.

This is unlike the creditors’ voluntary liquidation which is brought about by insolvency of the company and where the sale of its assets will be used to pay off its creditors. The thing they have in common though is the need to appoint a liquidator tasked to take care of the winding up process. The liquidator also takes care of seeing to it that the proceeds from the sale of assets are used to pay off the creditors and the liabilities first before distribution to owners and members are made.

Like most things this needs careful thought and consideration. A proposal has to be made and has to have the majority vote of shareholders. Furthermore, an assessment of the company’s financial position, assets, liabilities and other pertinent factors should be done to ascertain that the entity is indeed solvent. If proven that it is the opposite, a creditor’s voluntary liquidation will be done instead.

There are various reasons why corporate entities choose to have a member’s voluntary liquidation going. Below is a list of some of the said reasons:

  1. liquidationFirst is when the owners simply want to retire. It may seem unlikely and impossible at first but there are indeed owners who wish to live off from the product of their hard work and free themselves of all the stress attached with running a corporation.
  2. It can also happen when a significant member of an organization retires, dies or resigns. This is common in the technology industry as when a senior employee and the brain behind most of the business’ innovations, projects and ideas vacate his position.
  3. Also, when a subsidiary company turns dormant and its presence is deemed redundant and so has to be closed to preserve corporate assets and interest. Besides no one wants to keep a business that is no longer needed even if it is not generating any losses as of the moment.
  4. It is also fairly common in many family businesses where no one wants to succeed or run it.
  5. Another is when the business ceased to trade and its shareholders hope to obtain a tax efficient release of their capital ahead of retirement.