Winding Up Company Assets Through Enforcement

The first word raised when a company runs into payment difficulty is usually bankruptcy. Yet for both creditors and the company, bankruptcy is often the slowest and most expensive of the options.

The options

Composition. The debtor applies to court to restructure its debts by agreement with creditors. The court grants a provisional moratorium and appoints a commissioner; where the conditions are met a definitive moratorium follows. During the moratorium no enforcement may be commenced and existing proceedings are stayed. Suited to a business capable of continuing to trade.

Bankruptcy. The company's assets are gathered into an estate and realised by trustees for distribution to creditors. The process is long, and the costs of the estate reduce what creditors receive.

Enforcement-led liquidation. Trading stops and the assets are realised through existing enforcement proceedings and restructuring agreements with creditors, without entering the bankruptcy estate process.

When the third route fits

It is not always available. The picture in which it works has these features:

• A manageable number of creditors,
• A substantial share of claims secured, or a realistic prospect of agreement with creditors,
• Assets that are readily saleable and not subject to complex disputes,
• A management willing to run the process transparently.

Where these are absent, a single creditor's bankruptcy petition will take the process there anyway.

Directors' duty to notify

Whichever route is taken, directors carry a separate and time-sensitive duty: to notify the court once the company is established to be balance-sheet insolvent.

Failing to do so in time exposes directors personally. When signs of payment difficulty appear, the first step is to prepare interim balance sheets and establish whether the company is in fact insolvent.

What creditors should do

Seen from the other side, a few steps are decisive:

1. Move early. The creditor who attaches assets first gains a real advantage in the ranking.
2. Watch for transfers. Where the debtor transfers property to relatives, an avoidance action may be brought — within five years of the transaction.
3. Take part in a composition. Where a moratorium has been granted, register the claim in time and in the correct amount and vote on the proposal. A creditor who stays outside is still bound by a proposal the majority accepts.
4. Establish the security position. Whether a claim is secured determines directly how much of it is recoverable.

Conclusion

The route to take for a company in payment difficulty depends on its debt structure, the weight of secured claims and the nature of its assets. Steps taken before that assessment tend to produce consequences that are hard to reverse, for debtor and creditor alike.