Understanding the implications of a company’s liquidation can be a labyrinthine process.
It not only disrupts business operations, but it also throws up numerous legal and financial uncertainties.
This complexity escalates when it comes to the fate of existing contracts the company has entered into.
Whether you’re an employee, supplier, or customer, you might be asking:
What happens to those contracts?
How are they handled?
Who gets priority?
These are critical questions that need answering.
This article looks into the intricate world of liquidation, breaking down the implications for contracts, the status of employees’ contracts, the fate of a company’s debts, the recommended steps if you’re in contract with a liquidating company, and potential outcomes if you’re owed money.
Our goal is to provide a comprehensive guide to navigate through these complex scenarios, ensuring you’re well-equipped to manage such situations.
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What Happens to Contracts When a Company is Liquidated?
When a company enters liquidation, the fate of contracts is far from straightforward.
It’s not that contracts automatically become null and void when a company goes under.
Instead, the outcome hinges on decisions made by the liquidator – the insolvency professional who assumes control of the company’s affairs.
The liquidator has the power to either adopt or disclaim contracts.
Essentially, this means the liquidator can choose to continue with a contract if they deem it beneficial to the company’s creditors or terminate it if it’s considered burdensome or unprofitable.
Take for instance, a company that has a lease contract for its offices.
If the liquidator determines that the property can be sublet at a profit, they may choose to adopt the lease.
However, if the lease is at a high rate and the property can’t be profitably sublet, the liquidator could disclaim the lease.
However, it’s important to note that some contracts, such as those that have been fully performed by the insolvent company, can’t be disclaimed.
The same applies to contracts involving personal rights.
Related Post: What Happens During the Process of Company Liquidation?
What Happens to Employees’ Contracts When a Company is Liquidated?
Employees are often significantly affected when a company enters liquidation.
In the UK, the contract of employment is automatically terminated if the employer is declared insolvent.
This doesn’t mean that the employees are left in the lurch though.
Employees become ‘preferential creditors’ in the event of liquidation.
This status entitles them to certain payments before other unsecured creditors.
They can claim arrears of wages, holiday pay, redundancy payments, and contributions to occupational pension schemes from the assets of the liquidating company.
The reality, however, is that funds derived from the liquidation process are often insufficient to cover these claims.
Employees can apply to the National Insurance Fund for outstanding payments in such situations.
What Happens to a Company’s Debts When it is Liquidated?
Liquidation is essentially a means to settle a company’s debts by selling off its assets.
The order in which creditors are repaid is laid down in the Insolvency Act 1986.
Secured creditors must be repaid first, followed by preferential creditors, including employees.
Lastly, unsecured creditors are paid.
More often than not, unsecured creditors receive only a fraction of what they are owed, or in some cases, nothing.
Any debts that remain after the liquidation process are typically written off, except when personal guarantees were given by the company’s directors.
What Should You Do if You Have a Contract with a Company in Liquidation?
If you find yourself with a contract with a company that has gone into liquidation, it’s important to seek professional advice as soon as possible.
The liquidator may adopt or disclose your contract depending on the specific circumstances.
If the contract is disclaimed, you may become an unsecured creditor of the company, meaning your chances of receiving full payment under the contract can be significantly reduced.
Ensure you keep all records and documentation related to the contract, as these will be necessary to substantiate your claim in the liquidation process.
What Happens if a Company in Liquidation Owes You Money?
In a situation where a company in liquidation owes you money, you are classified as a creditor.
The type of creditor you are (secured, unsecured, or preferential) will determine your position in the queue for repayment.
Unfortunately, unsecured creditors often receive little to no payment.
If the company owes you a significant amount, seeking legal advice to understand your rights and potential options may be worthwhile.
It might also be possible to explore alternative recovery methods, like issuing a statutory demand or filing a winding-up petition, although these options should be considered with caution, as they can escalate the situation and may not always result in payment.
Final Notes On What Happens to Contracts When a Company Goes into Liquidation
The journey through a company’s liquidation can be a complex and stressful process for all parties involved.
Contracts are not automatically dissolved; instead, their fate lies in the hands of the liquidator and the interests of the creditors.
Employees’ contracts are terminated, but they have preferential status and may receive some payments.
If you find yourself in a contract with a company entering liquidation, seeking professional advice is paramount to navigate the challenging process and understand your rights and potential avenues for recovery.