Reviewed: 30th July 2019
‘Folding a business’ is an informal phrase that means a business will permanently close down. The term infers that adverse circumstances have caused its demise, rather than the owners or directors voluntarily deciding to close.
So why might a business fold and what could happen during the closure process?
What might cause a business to fold?
A business might fold for a number of reasons, but one of the most common is financial difficulty. The company may have unmanageable debt, for example, and with increasing pressure from creditors, could feel closure via voluntary liquidation is their only option.
In some instances businesses may be forced into liquidation by a creditor trying to recover their money, in which case the Official Receiver (OR) will become liquidator, at least initially. Sometimes the term is used to describe a business that has been struck off by Companies House, possibly for non-compliance – if company directors have failed to submit the statutory accounts or submissions, for instance.
What happens when businesses fold?
If a business folds due to financial decline but still owes money to creditors, a licensed insolvency practitioner (IP) is appointed to administer the liquidation process. Whether this is compulsory liquidation or entered into on a voluntary basis, all business’ assets are sold to generate the funds to repay creditors.
Once the assets have been realised the liquidator pays creditors in full or in part, in a strict order of priority set down in insolvency law. Additionally, an investigation will take place into director actions prior to the business folding, in an attempt to discover the reasons behind the company’s decline.
Loss of jobs and financial issues for those involved
When a business folds the result is typically job loss and financial loss for creditors and other stakeholders. The liquidator deals with any outstanding contracts and obligations on behalf of the business, and removes it from the register at Companies House if it is a limited company.
If you would like more information on why businesses fold, and the implications for those associated with it, please call our experts at Real Business Rescue. We are insolvency specialists and provide reliable independent advice to clients in all industries. We offer free same-day consultations and operate a wide network of offices nationwide so you are never far away from professional advice.
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