Sometimes, a company may find themselves facing liquidation, which can raise a number of worries and concerns.
In this guide, we’re going to be explaining everything you need to know about liquidation and explaining what terms such as solvent and insolvent mean and your options as a business owner if you find yourself in this position.
What Does Liquidation Mean?
The term ‘liquidation’ refers to the process of a business being closed and its assets distributed by an appointed licensed insolvency practitioner (also known as the liquidator).
Why Do Businesses Go into Liquidation?
The most common reason why a business might choose (or be forced) to liquidate its assets is due to insolvency.
This is when a business reaches a point where it is no longer able to make necessary payments where they are due.
Liquidation converts the business assets to cash, which can then be used to make these payments.
What are the Different Types of Liquidation?
There are three different types of liquidation.
Creditors’ Voluntary Liquidation
This is when your company is unable to pay its debts and you involve your creditors when you liquidate it. This is often seen as an exit from financial difficulty whilst addressing all of the creditors appropriately.
In order to do this, you must call a meeting of shareholders and ask them to vote on whether they agree to liquidate the company.
A minimum of 75% (by value of shares) of shareholders must agree to pass a ‘winding-up resolution’ in order for the liquidation to go ahead.
Once the decision has been made you must then appoint an authorised insolvency practitioner as liquidator to manage the liquidation. Your resolution must then be sent to Companies House within 15 days and advertised in The Gazette within 14 days.
Compulsory Liquidation
This is when your company is unable to pay its debts and you apply to the courts to liquidate it.
As the director, you can ask a court to order your company to stop trading and be liquidated. To do this, you need to show the court that your company is unable to pay its debts of £750+ and that 75% (by value of shares) of shareholders agree to the decision.
Members’ Voluntary Liquidation
This is where your company is able to pay its debts but you wish to close it down.
You may choose this if your company is ‘solvent’ (able to pay its debts) and one of the following applies:
- You wish to retire
- You wish to step down from the family business but nobody else wants to run it
- You no longer wish to run the family business any more.
To do this, you must review your company’s assets and then liabilities and make a ‘Declaration of Solvency’ (a statement to say the company can pay its debts).
What Happens When a Company Goes into Liquidation?
When a company goes into liquidation, it ceases to trade. Any employees are made redundant and the company itself will no longer exist as a legal entity after it is ‘struck off’ from the Companies House register.
As the director, you will lose any control over the company and you will no longer have access to any of the business’ bank accounts.
What is the Role of the Liquidator?
Once a liquidator has been appointed, they will manage the following:
- Settle any legal disputes or outstanding contracts.
- Assess all debts and decide which should be repaid in full or in part.
- Bring any outstanding contracts or legal disputes to an end.
- Seek valuations for company assets to maximise returns for creditors.
- Closely inspect the restoration of property that may have been sold at undervalue.
- Keep creditors up to date and involved in the decision-making process where appropriate.
- Communicate how creditor claims are progressing, reasons why the company failed and details about the redistribution of assets.
- Distribute funds to creditors fairly, considering the repayment structure which begins with the fees and expenses of the liquidation process itself.
- Interview and report on the factors that led to the company’s demise and liquidation.
- Report to the Secretary of State if he or she identifies director misconduct or fraud
- Dissolve the company.
How to Prevent Liquidation with Corporate Recovery
If you are concerned about your business’ current financial position and worried that you may become insolvent, there are some steps you can take first to avoid your situation becoming any worse.
Some of the most common causes of company collapses are bad debts, reduced demand, excessive borrowing, and low property values. All too often business owners do not face up to these problems until it is too late.
The key is to seek professional help as soon as the first signs of difficulty appear. With timely advice a company may be saved from liquidation or receivership, particularly if there is a genuinely profitable core to the business.
Our team of trained professionals can help you identify the cause of your problems and recommend solutions to improve profitability and cash flow. In some cases we can help you arrange a corporate or individual voluntary arrangement, which will allow you an opportunity to try to trade out of difficulty.
If it is necessary for your business to go into administration, receivership, or insolvency, we can advise and assist you, but the best advice is to come in for regular business health checks so we can identify potential difficulties at an early stage and recommend appropriate courses of action in plenty of time.
Get in touch with our team today to find out more about our corporate recovery services.