Mention Company Liquidation to directors of a company facing financial difficulty, and you could be met by a face not to dissimilar to if you had kidnapped their dog. Or perhaps eaten their lunch.
Company Liquidation is a term that instills dread in the un-informed leading directors to cower under their desks, less their business should come crashing down. The term sounds so corporate and foreboding that instantly it conjures imagery of worst case scenarios, and can make directors believe they have truly hit the end of the road. However Company Liquidation does not necessarily mean the death of a business, and the liquidation of a company can actually provide a viable option to stop a bad situation in its tracks, and prevent the position of creditors further deteriorating. In some cases directors can even resume trading under a new, or existing company name.
Company Liquidation is not taking the easy way out, but it is actually a far simpler process than most directors realise. In fact, it’s really a broad term that is used to describe two different liquidation procedures which are applicable to insolvent companies. Insolvent generally being defined as a company that is unable to make payments for the running of the business as and when they fall due, or where liabilities outweigh assets on the business’ balance sheet. There is a process available to solvent companies called a Members Voluntary Liquidation, but it is a lack of understanding about the following processes that have led to the term Company Liquidation falling out of favour with directors, and carrying sinister connotations of ruin and despair.
The first process is a Creditors Voluntary Liquidation (CVL), and put briefly, instigating a CVL would result in shareholders voting to cease trading, and begin the winding up of the company. This usually involves the realisation of company assets, and making dividend payments to creditors on a pro rata basis. This stops the situation dead in its tracks, inhibiting creditor loss and removing creditor pressure as well.
In certain instances the assets could even be sold to the existing directors at market value in order for them to resume trading under a new company name, possibly even the existing company name if the situation allows and insolvency rules are followed, which will preserve the jobs of employees. This is therefore not the inevitable levelling of a business which so many people often believe. Seeking a CVL quickly bears many advantages, including reducing the possibility that a director could be prosecuted personally for increasing losses to creditors and trading whilst insolvent.
The second Company Liquidation process is known as Compulsory Liquidation, and usually occurs when a creditor grows tired of issuing demands and final demands. This creditor can then apply to the courts to have a ‘winding up petition’ issued against the company, which, if approved, will set in motion the winding up of a company by the courts. However as this process is not voluntary and done via the courts, the outcome for directors and shareholders is likely to be less favourable than if directors had sought a Creditors Voluntary Liquidation.
Higher fees, lower returns, and the removal of any future prospects the business may have had mean that Compulsory Liquidation is a process best avoided, and any director who believes a Company Liquidation may be a viable way out will always be best seeking advice right away. Immediately consulting an experienced Insolvency Practitioner at Wilson Field will always yield the best outcome, as once a director knows a company is insolvent they risk becoming personally liable for any further debts to creditors, especially if they carry on trading and take no action.
Whilst Company Liquidations are often about as popular with directors as the prospect of having dinner with the in-laws, they are unfortunately a necessary phenomenon designed to minimalise creditor losses and prevent a bad situation getting worse. Hopefully directors are starting to dispel the misconception that liquidation is just a byword for razing a company to the ground, and that actually, liquidating a company can be the right thing to do in a large array of situation.