If your company is going through a period of financial distress or experiencing stagnating sales, you may find yourself faced with the prospect of having to place your company into liquidation.
This is especially the case if you are struggling to keep on top of your liabilities as and when they fall due. Once you begin missing payments, creditors can quickly become impatient and may take steps to wind up your company. Alternatively, you may recognise that the company’s financial concerns have taken it beyond the point of rescue, and have taken the decision to voluntarily close the doors for good before the situation gets worse. 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 types of liquidation procedures and discuss the options that your company has.
What Is Compulsory Liquidation?
Compulsory liquidation occurs when one or more of your creditors petitions to the court to have your company forced into liquidation. This is done through what is known as a winding up petition (WUP).
Understanding Winding Up Petitions (WUP)
A creditor can only issue a WUP if you owe them a debt of more than £750 and have failed to pay this debt after formal demand for payment of the debt has been made, or if they already have an unpaid County Court Judgment (CCJ) against your company. You will receive the petition at the company’s registered address; this will then be advertised in the Gazette following a period of not less than seven days.
After another seven days, the petition will be heard by the court who will decide whether to approve the petition and issue a winding up order. You should note that failure to respond to the petition will almost certainly result in a winding up order.
Once the winding up order is granted your company will be forced into compulsory liquidation and an Official Receiver, or liquidator, will be appointed. 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 Companies House register within 3 months of the conclusion of the liquidation.
As part of the liquidation process, all of the company’s assets will be sold and the proceeds then used to repay outstanding debts. Therefore should a creditor believe your company has significant enough assets to allow them to recoup some of the money owed, they may be inclined to take this course of action against your business. Forcing a company into compulsory liquidation is an expensive option and is therefore only used as a last resort, and typically only when the creditor has a realistic chance of seeing some returns.
Options for Stopping or Postponing Compulsory Liquidation
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 halt compulsory liquidation is to satisfy creditors by either paying the amount due, working out more manageable payment terms, or entering into a formal insolvency process.
If you have been served with a WUP, you need to act fast. Once the petition has been advertised in the Gazette, you only have seven days in which to come to some form of arrangement with your creditors, or pay the petition amount. Remember that any creditor that has taken this type of action against you is extremely serious in their intention to wind up your business, and they are therefore only likely to accept full payment, or a significant contribution towards the debt.
Once the petition has been heard and a winding up order granted, there is nothing that can be done to save the company. It is imperative you contact a licensed insolvency practitioner at the earliest available opportunity if you want to prevent your company being forcibly wound up.
Here are the main rescue routes that can be taken when a WUP has been issued and you are confronted with the prospect of entering into compulsory liquidation:
What is Creditors' Voluntary Liquidation (CVL)?
In a CVL the directors of an insolvent company concede to creditor pressures by contacting an insolvency practitioner themselves in order to begin the process of winding up the company voluntarily. A company must be insolvent in order for a CVL to be possible.
The shareholders and/or directors of the insolvent company will appoint their own liquidator, who must be a licensed insolvency practitioner, who will facilitate the process of selling the company's assets to repay creditors.
Why would a director choose to liquidate their company?
Although making the decision to wind up a company is never ideal, if the situation has got to a stage where the business is losing money, creditors are not being paid, and there is little chance of the financial situation improving in the future, then closing the company it is often the most sensible course of action to take.
It is worth remembering that as the director of a limited company you have certain legal duties and responsibilities. These become greater should your company become insolvent. At that stage your priorities must switch from doing what is best for your business, to putting the interests of your creditors first. Failure to do this could see you facing allegations of wrongful trading. If your company is insolvent, you are advised to contact an insolvency practitioner at the earliest available opportunity to discuss your options.
What is Members' Voluntary Liquidation (MVL)?
The final type of liquidation procedure is a Members’ Voluntary Liquidation (MVL). As with a CVL, an MVL is a voluntary procedure which is initiated by the company’s directors. However, the big difference between an MVL and the other forms of liquidation already discussed, is that this procedure is designed for solvent companies rather than those experiencing financial difficulties.
Why would a solvent company want to enter liquidation?
There are many reasons why an MVL may be a desirable option for a solvent company. MVLs are often used by directors who are approaching retirement and who have no further use for their company. While some businesses are passed down to the next generation or sold to an unconnected party, in many instances this is either not desirable or not possible, and the best move is for the company to be liquidated in order for the retained cash and assets to be extracted. This is where an MVL comes in.
The MVL process
A company can only enter into an MVL once its director have signed a sworn declaration of solvency, which essentially states that the business is solvent and that it will be able to repay all existing and contingent debts and liabilities within a period of no more than 12 months from 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 position of approaching 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 this money out of the business. Depending on your individual circumstances you may qualify for entrepreneurs’ relief (ER) which could see you take advantage of a reduced rate of capital gains tax.
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 close your company in the most appropriate and cost-effective manner.
What happens if a company is found to be insolvent after entering into an MVL?
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 disqualified 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.
When is liquidation not the best option?
While a company which is experiencing terminal financial decline must be placed into liquidation, in some instances a period of poor trading does not necessarily indicate that the business is beyond rescue. If the business is actually viable but has suffered a bad debt that has affected its cash flow, then relevant recovery processes like administration or a Company Voluntary Arrangement (CVA) may be better solutions for creditors.
Both of these processes often ensure that creditors receive some form of payment while allowing the company to continue trading. A company will typically only be able to enter into such a recovery procedure if it can be proven that creditors would stand to receive greater returns as a result than if the company was liquidated. As with liquidation, you can only enter into these procedures under the guidance of a licensed insolvency practitioner.
Your insolvency practitioner will be able to discuss all the options available, and will guide you as to the most appropriate one for your company based on its current and projected performance. If it has been decided that liquidation is not the best option then these are the main strategies employed:
Company Voluntary Arrangement (CVA)
A Company Voluntary Arrangement (CVA) is a formal payment plan agreed between an insolvent company and its creditors. 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 CVA with the help of a licensed insolvency practitioner. The insolvency practitioner will work with your board of directors to formulate, draft, and propose a CVA to creditors on your company's behalf.
Only companies that can demonstrate future viability are likely to have their proposal for a CVA accepted by creditors. The aim of a CVA is to use future profits to pay current liabilities; therefore unless the company can show a high likelihood of success going forwards, creditors will be hesitant to enter into this type of arrangement.
If the proposal is accepted by creditors, the CVA would allow for lower monthly payments, while also centralising all debts into a single commitment. It is likely that some debt will also be written off, as well as allowing lease terms to be renegotiated, placing the company in a more financially sound position. As long as your company makes the agreed contributions towards the agreement then no creditors included in the CVA would be able to take legal action against your company or demand additional payment to be made.
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 placing the company into administration may be the best way to halt legal action being taken by creditors.
Once a company enters administration, it is afforded legal protection by way of a moratorium, which means any immediate threat of compulsory liquidation would be postponed. As part of the administration, the appointed administrator will take control of the company and work towards facilitating the best possible return to creditors. This may result in the company continuing to trade after an element of restructuring, stabilising the company’s financials by way of an alternative rescue process such as a CVA, or else placing the company into liquidation should it be decided that there is no other option but to close the business for good.
Pre-pack administration is a specific type of administration procedure whereby the sale of the company and/or its assets is negotiated and agreed before an administrator is appointed. This sale can be to either a connected or unconnected party and can be used as a way of allowing the existing directors to buy the insolvent company’s assets and set up a new limited company (‘newco’) to trade from.
Keep in mind that there are very strict regulations governing this procedure, and it requires the involvement of agents, valuers, and solicitors.
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 not seem feasible for 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 invoices 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 on these amounts owed to you.
If you are concerned about the future of your company and are considering liquidation options, it is vital you take expert advice at an early stage. Never wait until the final hour to take action with your company's future; the sooner you get an insolvency professional involved the more options will be open to you and your business.
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 cash flow 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 insolvency practitioner without delay.
Call us today on 0800 644 6080 to arrange a free no-obligation consultation with a licensed insolvency practitioner. With 75 offices across the UK, you’re never far away from expert and confidential advice.
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