The term ‘liquidation’ refers to the formal insolvency process whereby any business activity ceases and the company is terminated.
Any assets belonging to the company are liquidated (i.e. turned into cash) and any monies generated by the sale of the company assets are used to pay creditors all or some of the money that is owed to them.
There are two primary liquidation procedures for companies that are insolvent:
- Creditors voluntary liquidation (CVL)
A CVL is when the directors of a company voluntarily make a decision to place the company into liquidation. This voluntary liquidation brings a number of benefits which are discussed in detail on our liquidation page click here.
- Compulsory liquidation
If a trade creditor or HMRC are owed £750 or more and have exhausted all attempts to collect the money owed they can issue a Winding Up Petition which will force the company into compulsory liquidation. Compulsory liquidation has many disadvantages over voluntary liquidation. Further information can be found on our compulsory liquidation page click here
It is important that directors are aware of the potential consequences of both types of liquidation.
Loss of goodwill and brand recognition
The brand recognition of a company will be lost when trading ceases and it enters into a CVL. If the time, money and effort that has gone into developing brand recognition is considered, a CVL is much more costly than the liquidator’s fees. Consequently, if the business model works but the company is suffering due to cash flow problems due to historic debt a CVL should only be considered as the last option. If the business can be rescued other options such as a CVA, pre-pack administration and pre-pack liquidation, which enable a continuation of trade whilst dealing with historic debt should be considered
It is a requirement for insolvency practitioners to carry out an investigation of the directors’ conduct whilst they were effectively in control of the company. If the investigation reveals that the directors failed to act in the creditor’s best interest, the director(s) may be accused of trading whilst insolvent or wrongful trading. In this instance, a director may be disqualified from being a director for up to 15years. Directors have a duty of care to the company’s creditors and cannot use the liquidation process as a tool to simply write off debt off debt unless it has genuinely failed and the directors have acted quickly once they were aware of the company’s insolvency.
Will you be held personally liable?
Whilst putting a business into voluntary liquidation may seem like an easy way to write off bad debt and close a company, it is important to remember that company directors are under a legal obligation to act within the creditors’ best interests. Consequently, if it is revealed that the directors are exploiting liquidation as a means of not paying creditors debts purposefully, it might result in the directors being held personally responsible for paying some or all of the debts.
If the company has assets to realise (sell), it is possible the assets will raise enough money to cover costs of the liquidation and no personal contributions will be required by the directors. If a company has no assets of any value to realise, then placing a company into a CVL is more costly for the directors as the procedure would need to be self-funded. The initial upfront costs for a CVL vary and will vary on a case by case basis.
If the company directors are not able to self-fund CVL costs ‘up-front’ and there are no sellable assets, there are two options:
- Compulsory Liquidation
Compulsory Liquidation involves either HMRC or a creditor forcing a company into liquidation and is one option for companies that are unable to self-fund a CVL. In this instance, the winding-up petition costs are paid for by the company’s trade creditor or HMRC. Initially, the case will be passed to the official receiver who may choose to pass the case to an independent firm of insolvency practitioners.
- Strike off or company dissolution
In certain instances, a company may be able to make an application to Companies House to be struck off the register and dissolved. There is, however, a lot of compliance required to ensure this process is carried out correctly. If the statutory compliance is not followed the application will be rejected. We have staff experienced in assisting with the company dissolution process, so if you feel you would help or are simply too busy, contact us now.