As a director considering liquidation for your company, there are many factors for you to consider. Finding the most effective method is naturally the top priority, but knowing how to navigate the legality of a procedure and how to enact it efficiently is of almost equal importance. Thankfully, these tasks can be handled by a licensed insolvency practitioner once one is appointed to your company. However, who appoints insolvency practitioners and at what time differs from procedure to procedure. As such, it is important to know how the appointment of an insolvency practitioner works before taking action.
In this article, Clarke Bell will discuss who appoints insolvency practitioners during liquidation, when these appointments take place, and how they can affect your company.
What is an insolvency practitioner?
An insolvency practitioner is a third party brought in to assist a company in enacting a specific procedure. While it is generally the case that insolvency practitioners will work with an insolvent company to address its financial situation, it is not uncommon that they will work with solvent companies, too.
For solvent companies, insolvency practitioners are brought in to place the company into Members’ Voluntary Liquidation (MVL), an incredibly tax-efficient method of closing a solvent company.
By contrast, insolvent companies require assistance with their financial state, leading to insolvency practitioners placing the company into Creditors’ Voluntary Liquidation (CVL) or another insolvency procedure.
Insolvency practitioners can fill a wide variety of roles. Who appoints them and when is heavily dependent on the type of insolvency procedure taking place. There is a great deal of difference between voluntary liquidation and compulsory liquidation, both in how they affect the appointment of insolvency practitioners and your company.
Who appoints insolvency practitioners during voluntary liquidation?
If a company is entered into a form of voluntary liquidation, a Members’ Voluntary Liquidation or a Creditors’ Voluntary Liquidation, the appointment of an insolvency practitioner is left to the discretion of company directors. The appointment of an insolvency practitioner can be made early on, once you have gained the consent of your fellow directors and have an idea of what you want for your company. Getting the necessary paperwork together before this appointment is a good idea, as your insolvency practitioner will be able to get started on an insolvency procedure without delay. Appointing an insolvency practitioner of your choosing is considerably advantageous, for several reasons.
Firstly, company directors may appoint an insolvency practitioner with the qualities best suited to their situation. Directors can factor in price, quality, and a range of other factors to settle on an appropriate insolvency practitioner, rather than have one assigned to their case without much thought. Furthermore, this insolvency practitioner can be appointed to a role that best suits directors, whether it be liquidator, administrator, or otherwise.
The second key advantage to appointing an insolvency practitioner regards directors’ duties to creditors. Once directors know that their company is insolvent, they must act in the interest of creditors or risk being accused of wrongful trading. By appointing an insolvency practitioner of their own volition, directors will demonstrate that they are willing to uphold this obligation, thereby reducing the risk of any wrongful trading accusations. This is highly beneficial to directors, as mitigating the risk of wrongful trading accusations means avoiding the potential of court battles and hefty punishments if you are found guilty.
(In a CVL the creditors can, in certain circumstances, replace the director’s choice…but this rarely happens.)
Who appoints insolvency practitioners during compulsory liquidation?
In some scenarios, a company will be entered into compulsory liquidation, regardless of the wishes of its directors. There are several reasons why this could happen, with the most common being the serving of a winding-up petition. Such petitions can be served by third parties, typically outstanding creditors, who have lost faith in a company’s ability to recover from a poor financial situation. If accepted by the courts and not successfully contested by directors, this winding-up petition will lead to compulsory liquidation for the company in question. This has several disadvantages for the company and its directors, with loss of control being one of them. In this case, the courts will handle the appointment of an insolvency practitioner.
Also Read: How To Find an Insolvency Practitioner
Being forced into compulsory liquidation is generally not a good situation for a company and its directors. Not having the freedom to appoint an insolvency practitioner of their choosing is a notable downside, as it prevents directors from appointing an insolvency practitioner who they think is most suitable for their company. Moreover, directors have no influence over the procedure once compulsory liquidation has been decided upon; the insolvency practitioner will be appointed by the courts.
As the decision to enter insolvency proceedings was made on behalf of directors, rather than of their own volition, this inaction is often viewed unfavourably. It can be interpreted as a failure by directors to uphold their obligations to creditors.
Clarke Bell can help you
If you want to appoint an insolvency practitioner for your company, Clarke Bell can help you.
We can help whether you are looking to close your solvent company with an MVL, or want advice on the best way to deal with your company’s debt problems.
We have more than 28 years of experience in helping company directors, and we can help you.
Contact us today for your free, no-obligation consultation.