COVID-19 has dealt a severe blow to the cash flow of countless companies. Many businesses which performed well prior to the pandemic, may now have become unviable. As a result, these companies face insolvency and will either require investment to shore up losses or a liquidation to wind up the company. The question often facing directors is that, if funds are available, should they put them into the insolvent company or set up a new company?
At Crowe we help directors of insolvent companies make the best decisions and make the best of what is a difficult situation. In the first of a two-part article, our restructuring and insolvency team answer some of the frequently asked questions from directors of ailing companies.
However, there are many circumstances in which a company may not pass one or both of the above tests but it is still reasonable for the directors to continue to trade. For example, certain companies may have a seasonal business where the company may temporarily fall into insolvency during the quiet period and subsequently regain solvency once trade improves. This fact has been recognised by the courts, and in the case of Re Hefferon Kearns Ltd the judge remarked that:
“it would not be in the interests of the community that whenever there might appear to be any significant danger that a company was going to become insolvent, the directors should immediately cease trading and close down the business. Many businesses which might well have survived by continuing to trade coupled with remedial measures could be lost to the community.”
Therefore, the decision to cease trading and liquidate should be made when the company is insolvent and the directors are satisfied that there is no reasonable chance of the company being able to trade out of its insolvent position. Company directors should seek appropriate professional advice at this point as there may be alternatives available to winding up the company, such as informal restructuring, examinership, a scheme of arrangement, etc.
In part two of this article, which includes a downloadable factsheet, we answer questions about the cost of liquidations and what exposure company directors may have to creditors, what is required of a director during the liquidation process, how long it can typically take and how Crowe can support directors through the process.
Please contact a member of our restructuring and insolvency team if you wish to confidentially discuss your requirements and receive a no-obligation consultation.