Be careful when taking advice that you are actually speaking to a qualified insolvency practitioner and not a broker or middleman who may look to charge unnecessary upfront fees.
Are creditors threatening to put you out of business and force your company into compulsory liquidation? Are you wanting to stop this from happening, or are you considering the possibility of winding up voluntarily? Either way, the information below will tell you what you need to know to devise a suitable course of action:
There are three types of liquidation:
All three of these procedures are subject to the rules and regulations specified in the Insolvency Act 1986, and as such have their own sets of prerequisites and unique features.
In the following guide we'll explain the basics of these liquidation types and discuss the options that your company has:
Since this is this often the most troublesome type of liquidation for a director to encounter we'll cover it first. In a compulsory liquidation one or more of your creditors petitions to the court to have your company forced into liquidation so that all of its assets can be sold and the proceeds used to repay outstanding debts.
A creditor can only issue a winding up petition if you owe them a debt of more than £750 and have failed to pay this debt after formal payment demand for the debt has been made, or if they already have an unpaid County Court Judgment (CCJ) against your company. The end result of compulsory liquidation will be the dissolution of your business - the company will cease to exist and will be struck off the register within 3 months of the conclusion of the liquidation.
Click here to learn more about compulsory liquidation, or continue reading to see an overview of your options for postponing or halting the process.
Although the options available to your company will depend on how far along you are in the process (particularly whether a winding up order has already been made) the main point to remember is that the only way to stop compulsory liquidation is to satisfy creditors by either paying the amount due, working out a more manageable payment terms or enter into a formal insolvency process.
Here are the main rescue routes that can be taken when confronted with the prospect of entering into compulsory liquidation:
If a creditor has not yet issued a winding up petition against your company, or if the petition has been served within the past few days, then you may still have time to formally propose a company voluntary arrangement (CVA) with the help of a licensed insolvency practitioner (IP). The IP will work with your board of directors to formulate, draft, and propose a CVA to creditors on your company's behalf. This type of procedure tends to offer higher success rates then independent negotiations conducted via telephone or email correspondence. This is probably due to the fact that creditors trust the opinions and propositions of insolvency practitioners.
Since IPs are legally obligated to act in the best interests of an insolvent company's creditors, usually your lenders, the bank, and/or HMRC will be willing to accept the arrangement if it is viable. If accepted, the CVA would provide lower monthly payment requirements, while also centralising all debts into a single commitment. As long as your company makes the specified contributions into the designated trust account then no creditors involved in the CVA would be able to take legal action against your company under the terms of the arrangement.
If a CVA cannot be arranged or it seems as though the company will be forced into liquidation before a solution can be reached, then applying for an administration order and entering into company administration may be the best way to halt legal action being taken by creditors. If the order is granted then any immediate threat of compulsory liquidation would be postponed while a licensed IP is appointed to act as the administrator of your company, operating with the goal of dealing with the debts and facilitating a return to creditors.
If a winding up petition has not yet been served, but you've already received a formal demand for payment or creditors are already threatening liquidation then you may still have time to seek emergency financing. This option may seem irrelevant to a company that has poor credit and overwhelming debt obligations, but in reality it may still be possible to raise funds through asset-based financing methods if your company has valuable assets that can be used as collateral or leverage. In addition, if you have outstanding invoice payments with clients who have a reliable history of paying then you may be able to use invoice discounting or factoring to get a cash advance.
If it appears that the liquidation of the company is imminent and no recovery is possible, but you'd like to preserve the company's assets before it goes out of business, then your IP may recommend the arrangement of a pre-packaged administration sale of assets to a third party. The assets could then be sold and transferred to the third party so that the business could continue operating under the new company without interruption. Keep in mind that there are very strict regulations governing this somewhat controversial procedure, and it can only be considered after all other options have been examined. The Pre Pack option route requires the involvement of agents, valuers and solicitors.
Never wait until the final hour to take action with your company's future, even more so if you feel it is potentially viabile going forward.
In a CVL the directors of a insolvent company concede to creditor pressures by contacting an insolvency practitioner and passing a resolution to appoint the IP as liquidator in order to begin the process of winding up the company voluntarily. The appointed liquidator then calls a meeting of the company's creditors and facilitates the process of selling the company's assets to repay the creditors.
The main benefit of entering into liquidation voluntarily is that you reduce the likelihood of being accused of wrongful or fraudulent trading during the investigation conducted by the liquidator, which will take place whilst the company is in liquidation. The appointed liquidator is required by law to report the findings of the investigation to Court and The Insolvency Service (BIS). When you enter into a CVL you'll have the guidance and assistance of a licensed insolvency practitioner from the very beginning, so you'll know exactly what needs to be done as and when in order to minimise the chances of facing allegations of misconduct during insolvency.
A company can only enter into an members voluntary liquidation (MVL) if it is able to draft a sworn statement of insolvency, which essentially states that the business is solvent, given current income and cash flow projections, it will be able to repay all existing and contingent debts and liabilities within a period of no more than 12 months of entering liquidation. Therefore, an MVL is not a solution for insolvent companies that are being pressured by creditors. Instead, an MVL can be used as an effective way to extract the value of a business in one lump sum and distribute it amongst shareholders.
An MVL offers a number of tax advantages in comparison to withdrawing the value of the business in the form of dividends. For example, if you are in the fortunate position of seeking retirement and your company has £100,000 cash in the bank and no creditors, an MVL may be used as a tax-efficient way of taking the money out of the business. Accountants can handle this the process for you, however the money would have to be drawn out over a few years to take advantage of the same lower tax rate without using the MVL process.
Our experts at Real Business Rescue can advise as to whether an MVL would be the best process for you and can work with your accountant to ensure that you get the best advice.
An insolvent company should never attempt to enter into an MVL, especially if the directors already have knowledge that the business is insolvent. Drafting a false statement of solvency is a serious offence that could cause you to be banned from acting as the director of any limited company registered in the UK for a period of up to 15 years. If a company is found to be insolvent after entering into an MVL then an investigation will be conducted by the liquidator to ascertain whether there were fraudulent intentions or the company simply miscalculated. This issue usually arises when directors and/or their appointed liquidator fails to take contingent liabilities into account. Regardless of whether the directors face consequences for drafting a false statement of insolvency, the end result will be that the MVL will be converted into a CVL at the creditors' meeting.
The fact that the company has been placed into compulsory liquidation or creditors’ voluntary liquidation means that there are insufficient assets to pay creditors all that they are owed. Once the company has been placed into liquidation, the assets are sold on what is known as a “forced sale” basis which means that they will not be sold for cost value, but instead the best offer will be taken. If the business is actually viable but has suffered a bad debt that has affected its cashflow, then relevant recovery processes like administration or company voluntary arrangement may be better solutions for creditors. Both of these processes often ensure that creditors receive some form of payment.
After every liquidation procedure the liquidator is obligated to carry out an investigation with the goal of ascertaining whether the directors of the company adhered to their duties while trading insolvently. The best way to avoid such allegations is to consult with an insolvency practitioner as soon as you're aware of the fact that the company could be entering into liquidation. The directors must not allow the creditors' position to worsen once they realise their company is insolvent.
Nowadays the liquidation process is somewhat common knowledge, which results in experts emerging in the local pub (because their mate did it and it was easy!). However, liquidation is not always the road to follow. A good insolvency practitioner will review the financial records of the company to determine the best process available for both the company and its creditors. As soon as the company suffers some form of cashflow problem (for instance due to a problematic debt) and cannot pay its creditors within the specified credit terms, advice should be sought from a licensed IP without delay.
Keep in mind that, once you're aware that the company is insolvent, you could be accused of wrongful trading if action is not taken immediately! For a free consultation call us today on 0800 644 6080 or send us an email instead.
Wednesday 26th August, 2015 Written by Keith Tully
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