Updated: 6th February 2021
When a company suffers severe financial decline and enters insolvency, in some cases liquidation will be the only option. Insolvency laws in the UK mean that directors face serious consequences if they allow a company to continue trading when insolvent, so if shareholders try to block the liquidation process, it can create a serious issue.
Shareholders may not fully understand the implications of their actions – maybe they believe there are other options, but by blocking liquidation they’re preventing directors from fulfilling their legal obligations to creditors.
Conversely, shareholders can also force liquidation, and this can provide a route out of a potentially dangerous, deadlocked situation between a director and the company’s shareholders.
So how do shareholders block or force liquidation?
When a director seeks professional advice on the financial position of their company, and liquidation is the only option, shareholders vote on whether to voluntarily place the company into liquidation.
A majority of 75% (by value of shares) is required to vote in favour of the resolution for it to be passed. If this majority isn’t achieved the process cannot go ahead, which places directors at risk of trading wrongfully.
This is because, when a company enters insolvency, the duties of directors change. They must place the interests of creditors first by ensuring that no further financial losses are suffered, and also seek help from a licensed insolvency practitioner (IP).
If shareholders try to block a liquidation, it would be valuable to hold a meeting with them and a licensed insolvency practitioner - with a view to explaining directors’ legal obligations to creditors, and the necessity to cease trading when insolvent.
Waiting for a creditor to forcibly liquidate the company could result in action against the director(s) personally, including being held liable for any additional debts incurred by the creditors.
In order to resolve this type of liquidation ‘stalemate,’ a director or shareholder who believes the company should be liquidated could force the situation using a specific type of winding up petition.
Shareholders and directors can force liquidation via a ‘just and equitable’ winding up petition. This is a liquidation that’s triggered via the court, and can be used to end a deadlock where shareholders block a liquidation process.
It’s also commonly used where there are two directors who can’t agree on whether to liquidate. So how does a just and equitable winding up work? Essentially, the decision on liquidation is placed with the court. They look at any other available options, but if they decide that the company needs to be liquidated, a winding up order is granted.
Voluntary liquidation is a formal process that has professional fees attached, and this may appear to prohibit its use. If the company owns assets, however, they’ll be sold as part of the liquidation process, and the proceeds can help to pay for the procedure in part or in full.
The liquidator arranges for these assets to be professionally valued, and if the director is considering setting up a new company after the liquidation, they may be able to purchase these assets from the liquidator.
Another way to pay for the professional fees incurred in a Creditors’ Voluntary Liquidation (CVL) is for directors to claim redundancy pay. The average claim for director redundancy is £9,000, and eligibility requirements include working for their company as an employee for at least two years.
For further information and independent advice on whether shareholders can block or force liquidation, please contact our partner-led team at Real Business Rescue. We’ll assess your company’s situation, and also the implications for you as a director. Please get in touch to arrange a free, same-day consultation – our extensive network of nationwide offices means you’re never far away from professional help.
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