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DRAFT LETTER - LPC - COMPANY INSOLVENCY
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DRAFT LETTER ON COMPANY INSOLVENCY. PREPARATION FOR THE BLP EXAM ON THE LEGAL PRACTICE COURSE. DISTINCTION LEVEL.
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Dear…Company Insolvency: what it means and the alternatives.
Further to or previous communications I now set out my advice in relation to what
insolvency would mean.
I would like to first make you aware that if the company is indeed insolvent then your duty
shifts from the interests of the company towards the creditors themselves and you must try
your best to take actions in such a manner than ensures the best repayment for the
creditors.
Introduction.
Corporate insolvency proceedings may be considered in situations where your company is
experiencing cash flow problems and needs to take positive action when liabilities exceed
asset but most often only encountered where there is a serious financial problem.
There are multiple options available depending on how serious the financial situation of the
company is and who wants to initiate proceedings. Depending on which method you choose
to undertake determines what will happen to the company.
I will details the options available to you and their consequences for the company if
proceeded with. I will include the impact of the options on shareholders and directors.
What is insolvency?
Insolvency occurs where:
Company is unable to pay its debts when due; or
Liabilities outweigh the company’s assets; or
Creditors take steps to enforce their rights against the company which return
unsatisfied; or
Statutory demand served on the company and the debt is not satisfied or secured to
the creditors or legitimately disputed within 21 days.
Alternatives to insolvency proceedings.
Before considering any insolvency procedures, as a director you should always consider
some other options that are available.
These include:
Calling in debts owed to the company
Investment from venture capitalists
Selling off debts owed to the company.
The other main options are:
1. Negotiate
Negotiating with your creditor and explaining any reason why you have defaulted to them
and trying to come to an amicable informal agreement that benefits you both.
2. Company voluntary arrangement
As directors you should consider entering into a creditors voluntary arrangement which is a
formal binding agreement by creditors to forgo or wait for part of their debt. In order for a
CVA to work properly in helping the company manage its finances it needs the support of
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