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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




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