Updated: 14th November 2020
Understanding how to wind up a company can be quite confusing because the procedure for doing so is different for a solvent company than it would be for an insolvent company. However, if you are looking to strike off your business, we can presume your company is solvent and will be able to pay off any outstanding creditors in full.
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For companies in the UK looking to wind up their company, there are two main types of voluntary liquidation and it is imperative to understand which applies to your situation. If your company is solvent you would utilise what is known as a Members’ Voluntary Liquidation (MVL), but if you cannot hope to pay your debtors the procedure would be called a Creditors’ Voluntary Liquidation (CVL).
Although these terms are often used interchangeably, they are really two separate steps in the process of going out of business. Winding up a company deals with ending business affairs whilst liquidation is the sale of a company’s assets and usually the final step before striking a business off the register.
Winding up – Once it has been determined that a company is to be wound up, there are a number of relationships and obligations which must be terminated. Whether a company is solvent or insolvent, obligations to customers, suppliers and employees must be brought to a close (wound up). All the company’s affairs are put in order prior to liquidation.
Liquidation – Once all long-term relationships have been severed and obligations have been dealt with, the business’ assets are liquidated (sold) and according to UK law, this must be handled by a licensed Insolvency Practitioner. Here is where it gets a bit tricky. If the business is solvent and all debts are satisfied, the proceeds are distributed among members. If the company is insolvent, the top priority is paying off creditors even if there is nothing left to be distributed to members.
Whilst it is true that some of a company’s assets may be liquidated during the winding up stage, it is usual for such things as equipment and the building and/or land to be liquidated only after winding up is complete. Since there are so many variables involved and UK law quite specific, only a professional IP is qualified to liquidate a company’s assets.
Speaking of UK law, one of the first steps in winding up a company is the directors’ resolution. This is especially significant if a company is seeking an MVL since the directors will be asked to sign a Declaration of Solvency. The legal ramifications if anything is deemed to be falsified on this declaration can be quite severe. With the aid of a licensed Insolvency Practitioner, the directors can draw up the necessary documents in which they swear that the company is, indeed, solvent and can be expected to have the financial ability to pay debts within a 12 month period of the expected liquidation date. The Declaration is first sworn in the presence of a solicitor and then filed with Companies House.
When it is deemed that the directors have made a full enquiry into the company’s financial affairs and the company is in fact solvent, the first step in winding up a company is to hold a meeting of the board. From there, there are several phases leading up to liquidation and striking a business off the register. The process generally follows these steps:
Although it isn’t actually necessary to appoint an IP prior to liquidation, UK law is quite specific. Since the process for winding up a solvent and insolvent company are quite similar, UK law recognises the expertise of Insolvency Practitioners so they are the only professionals allowed to be liquidators.
If the company is insolvent or the majority of directors cannot agree on a Declaration of Solvency, winding up would utilise a Creditors’ Voluntary Liquidation procedure. They are quite similar in terms of time constraints and statutory filings, but the emphasis throughout a CVL is on the creditors. There may be nothing left at the end of liquidation to distribute to shareholders simply because an insolvent company sought to be wound up. Also, there are times when a majority of directors have signed the Declaration of Solvency only to find out later in the process that the company was not in fact solvent. In this case an MVL would automatically become a CVL. The main difference in procedure is that there must be a meeting with the creditors in a CVL since the company is insolvent and cannot satisfy its debts.
There is more to winding up a company than simply deciding to shut the doors and go out of business. Even during early phases of a CVL when it is not statutory to utilise a licensed Insolvency Practitioner, it is often beneficial to take advantage of their expertise. Every step along the way needs to be done timely and according to rules and regulations. Missing just one step could be costly in terms of time, money and penalties which could be imposed. Before deciding how to wind up your company and strike your business off the books, talk to the experts at Real Business Rescue to make sure you have made the best choice for your company, its shareholders and your creditors.