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HomeFinance and AccountingInsolvencyShutting down an insolvent Limited Company

Shutting down an insolvent Limited Company

Due to the outbreak of COVID-19, many companies are striving hard to survive the tense economic scenario. However, a common misconception prevails that a company decides to close only when it fails. This is not always true, as directors can close a company for a plethora of other reasons. 

However, closing a company gets manifold times difficult if it is insolvent. If a company is unable to pay its bills or its liabilities exceed its assets, then it requires a Creditor’s Voluntary Liquidation. This is the most popular kind of liquidation that a company’s director applies for. To close an insolvent company, the director can apply a petition for winding up via a CVL or Creditor’s Voluntary Liquidation. To initiate this process, the company has to arrange a board meeting and seek the support of nearly 75% of its shareholders. When a company files a petition, an Official Receiver is appointed by the court. The liquidator examines the company’s liquidation and decides if the order for closing Down a limited company is liable to be granted. 

What Does The Official Receiver Do?

The Official Receiver works as a liquidator. He examines the liquidation status of the company. The Receiver is also entrusted with investigating if the directors of the company had committed some fraudulent transactions at the time of insolvency. This could be done if the directors used improper records or over-paid during trading. In case of any discrepancy, the directors of the company are liable to be imprisoned.

Difference Between Voluntary And Mandatory Winding Up

There are two categories in which the winding-up of limited companies can be categorized- voluntary and compulsory. The major difference between mandatory and voluntary liquidation lies in whether it was the director’s idea to shut down the business. In both cases, this is an ultimate step, and there is no scope for the company’s turnaround.

According to experts, voluntary liquidation and winding up is the ideal choice for any business company. Compulsory liquidation means having to wait for the creditors to suggest that a limited company should close. This imparts the idea that the directors were neglecting the financial state of the company. Compulsory liquidation is a lengthy procedure. 

On the contrary, a call for voluntary liquidation suggests that the directors are proactive. This process is comparatively quicker, and the employees will receive compensation early. In the case of voluntary winding up, the directors get to remain in charge of the whole procedure and examine it thoroughly. It also boosts their chances of creating a phoenix company in the same industry. 

The Directors Should Inform The Interested Parties

The directors need to pass a legal notice to all the interested parties regarding the closing of the limited company. This included everyone, even if there is a possibility that an individual might object to the decision. If a director fails to do so, it can lead to miscommunication and misinterpretation. As a result, the directors may be charged a fine or even imprisoned. 

In the case of voluntary winding up of a company, the interested parties have to be informed within seven days since the petition’s filing. It should also apply for an official and legal record of insolvency. 

Procedure Of Settling Debts

When a limited company is about to close, it has to settle all the debts before closing it. It is ideal if the director of the company leaves it to the professionals. The professionals get in touch with the creditors and ask them to present the proof of the debt template. If the documents provided are satisfactory, then they will be eligible for the repayment in a hierarchical order. The first in this order comes secured creditors who have a fixed charge. Banks and other lenders, who have secured an asset as the company’s collateral, come under this category. The hierarchy provides preference to secured creditors, preferential creditors, all interest on debts accrued by the company, shareholders, and so on. 

Employee Payment

When it comes to employee payments, there is a security blanket. If a business goes insolvent and the company has no money, then the government’s employee payments are made. When the liquidation starts, the liquidator contacts the employees and advises them on steps they need to follow to claim their share. Based on the effort of the employee, each of them will receive their dues. 

Additional Information

If a limited company does not have a director, it cannot be closed without a new director. Although a company with no directors is considered obsolete and non-existent, not having a company director may lead to trouble in asset management. Similarly, if a company does not trade for a long time, it becomes dormant. For these special cases, it is always advisable to seek the assistance of legal professionals. 

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