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Unit 10: Liquidation of Companies: Preparation of Accounts
The major areas to be considered by the Liquidator are as follows: notes
l z Preferences: This is where a creditor has had his position improved in the time leading up
to the liquidation simply because the directors wished to achieve that effect.
l z Fraudulent Trading: This is where it can be demonstrated that the business of the company
has been continued with a view to defrauding the creditors. This is also a criminal offence.
As can be anticipated, this carries a very high burden of proof for the Liquidator who
effectively has to prove “the criminal mind”. This has invariably been a very difficult area
for Liquidators to succeed in.
l z Wrongful Trading: This is where a point is reached where the directors knew or ought to
have known that the company could not realistically avoid insolvent liquidation. If the
directors then fail to take steps to place the company into liquidation, instead continuing
the business and worsening the position, then they can be held liable to make a contribution
to the assets of the company, commensurate with the further losses incurred. There are
defences, such as implementing a rescue package in conjunction with professional advice.
However, it therefore follows that as soon as the directors ascertain that a company is
insolvent (defined as “unable to pay its debts when they fall due” or “its assets are less
than its liabilities, including contingent liabilities”) they must be seen to take professional
advice and to act in accordance with it. As and when it becomes clear that the company
cannot avoid an insolvent liquidation, they must take steps to place the company into
liquidation.
self assessment
Fill in the blanks:
4. ................. claims have to be paid in full before any funds are paid to ordinary (or non
preferential) creditors.
5. Any guarantees given by the ................. of any of the company’s debts will, most likely, be
immediately crystallised upon liquidation.
6. The ................. appointment means the directors no longer have to file accounts or annual
returns, but does not negate any penalties which have already been incurred for default in
that respect.
Caselet franchise company - car Window tinting
he Director of the business invested much of his savings to buy an expensive
franchise. He was worried that it was not performing well and he was investing
Tin more and more capital. The business had purchased equipment on HP and had
numerous additional debts. However, these could not be satisfied by day to day trading.
The director decided that the business was fundamentally flawed as it was based in the
wrong location.
The decision was taken to voluntarily liquidate the company. The business ceased to trade.
There were little or no business assets. However, there were various debtors due to be
collected. Given all payments to creditors were stopped, this cash inflow was sufficient to
pay for the cost of the voluntary liquidation and return a minor sum to the creditors.
The director decided to find employment and now works in the same sector but as a
manufacturing director for a car tinting company in West London. In this way, he has
avoided personal bankruptcy, kept his home and his marriage/family.
Source: http://coopermatthews.com/case-studies-liquidations.html
lovely professional university 201