Liquidation options and what they mean for your company
If you’re a company director or shareholder thinking about closing your business, liquidation is one way to do this. Here we discuss what liquidation is, the different types of liquidation, and the implications for a company and its stakeholders.
We’ll explore liquidation options comprehensively, from solvent to insolvent, to help you understand the range of choices available.
There are formal and sometimes complex processes involved. But with the help of a licensed insolvency practitioner, the liquidation process can be navigated without becoming a burden. This can give you, and your business, a fresh start.
What is liquidation?
Liquidation is the process of winding down or closing a company’s operations. It is often considered when a business faces financial difficulties. Sometimes however, solvent companies decide to voluntarily wind down their operations through liquidation.
There are various situations that might initiate a liquidation. When a company isn’t able to pay its debts or continue operating, the liquidation involves an appointed Liquidator dealing with the stakeholders to include your creditors, such as HMRC, employees, bank’s and suppliers. The Liquidator will be responsible for selling the company’s assets in an attempt to recover funds for those creditors. The Company effectively ceases to operate when the process formally begins.
In all cases, the primary goal of liquidation is to maximise a company’s assets so that creditors (people or businesses that are owed money by the company) can be paid. In the unusual event that surplus funds are available to pay back all creditors, after costs, then any outstanding funds are distributed between the company shareholders.
The liquidation process has to be managed by a licensed Insolvency Practitioner, who can act as a liquidator and who will make sure legal requirements are met in dealing with the appointment.
The most common liquidation triggers
The most common trigger of liquidation is cash flow insolvency, often caused by declining revenues, financial mismanagement, overtrading, or in many cases bad debt. Sometimes it just comes down to bad luck. For instance, when economic downturns or market shifts occur, even well-managed businesses may face financial hardship.
Alternatively, a business may simply reach the end of its life, for example when its director decides to retire or as part of a merger or acquisition process. Liquidation might then be initiated to close the company.
The main types of liquidation
There are two main types of liquidation:
1. Voluntary liquidation
A company’s director’s instigate the process, ratified by shareholders who proactively decide to close the business, maintaining control over the process.
2. Compulsory (or involuntary) liquidation
This is typically initiated and controlled by parties outside of the company, such as the creditors, when a company cannot meet its financial obligations.
Voluntary liquidation
Two further distinctions apply within the voluntary liquidation process depending on the company’s financial situation.
Solvent companies go through Members’ Voluntary Liquidation (MVL).
A solvent company is able to meet its current and future financial obligations while it continues to operate. In other words, it has enough assets to cover its liabilities.
Members’ Voluntary Liquidation is the formal process a solvent company goes through to voluntarily wind up the business and distribute assets to its shareholders. MVL is initiated by the company shareholders who maintain control over the process.
To do this the company must be considered financially healthy and capable of paying off its debts within twelve months of the process starting.
During MVL the solvent company pays off its debts in full and any remaining assets are distributed fairly to shareholders in line with their shareholdings.
A liquidator is appointed to oversee the process. As well as offering tax advantages for shareholders, MVL makes sure that a company’s affairs are closed formally and in compliance with legal requirements.
Insolvent companies go through Creditors’ Voluntary Liquidation (CVL).
An insolvent company is not able to meet its financial obligations. This means either that the value of the company’s liabilities is greater than the value of the company’s assets, or simply it is unable to meet its payments as and when they fall due.
Creditors’ Voluntary Liquidation (CVL) is a formal process initiated by the directors, ratified by the shareholders of a company deemed to be insolvent. The main aim of CVL is to bring the Company to an orderly winding up and realise the company’s assets so that the proceeds can be used to pay creditors.
In this case, a licensed insolvency practitioner is appointed as the liquidator who takes control of the company’s affairs and oversees the CVL process.
CVL allows company directors to take a proactive approach to liquidation. Although legal obligations can be complex, CVL offers a well-structured, fair, and transparent approach to wind up a company in financial distress.
In some cases, we can use a CVL as a Start Afresh Liquidation. This allows businesses a second chance and this is often referred to under the term “phoenixing”.
Compulsory (or involuntary) liquidation
Compulsory liquidation is a legal process initiated typically by creditors or regulators to wind up the affairs of a company unable to meet its financial obligations.
Unlike MVL or CVL, which are initiated by the company’s directors and shareholders, a compulsory liquidation is enforced by parties outside of the company. A lender or supplier will petition the court to force a liquidation because the company in question has not repaid its debts.
The courts issue a winding-up order, and a licensed insolvency practitioner is appointed to take control of the company’s assets. The liquidation process then distributes proceeds to creditors according to statutory priorities.
Compulsory liquidation can generally be avoided if companies seek help before a creditor feels it necessary to petition the court. On occasions, it’s still possible to steer a company through voluntary liquidation even after a compulsory liquidation has been triggered.
The liquidation process for insolvent companies
Once the initial decision to wind up a company has been made, a licensed insolvency practitioner is appointed as the liquidator.
The liquidator will manage the sale of the company’s assets, adjudicate creditor claims and then distribute the remaining funds in an agreed priority.
The liquidator is also legally obliged to investigate the conduct of the company directors and look into historical company affairs.
Creditor involvement includes submitting claims for payment and participating in decision procedures to approve the liquidation plan. In some cases a creditors’ committee might be formed to give input on important decisions.
Other stakeholders with interests, like employees, will also be taken into consideration within the plan.
There are strict legal requirements and procedures that must be followed throughout the liquidation process including notifying creditors, obtaining court approvals, publishing notices, and making sure asset distribution is fair and transparent.
If you’re thinking about liquidation as an option for your company, talk to us as soon as you can. As licensed insolvency practitioners and liquidation experts, we’ll be able to steer you in the right direction for your business.
Asset distribution
An important part of the liquidator’s role is to identify and value assets. This includes assessing the market worth of assets, and overseeing the sale itself.
Payments to creditors must be made fairly and follow a predetermined hierarchy. Secured creditors, such as banks with charges on specific assets, are prioritised over unsecured creditors.
Preferential creditors, such as employees with outstanding wages or entitlements, or HMRC, are the next priority.
On occasion, a company will have no assets to sell. We offer a No Asset Liquidation service at a competitive fixed fee. If this applies to you, speak to one of our liquidation and insolvency experts about accessing this service.
The liquidation process for solvent companies
As we’ve seen, when the directors and shareholders of a solvent company decide to wind up the business, the company goes through Members Voluntary Liquidation.
Before MVL can take place, company directors must make a statutory declaration of solvency, which confirms that the company can pay its debts within 12 months.
Following this, a liquidator is appointed to oversee the process. Shareholders will vote on the appointment of a liquidator.
The liquidator will then manage the realisation of the company’s assets, settle any debts, and distribute proceeds among shareholders.
In an MVL, shareholders might benefit from tax advantages including capital gains tax being applied to proceeds rather than income tax (capital gains tax is usually lower than income tax). Business Asset Disposal Relief (old school Entreprenuer’s Relief) can also be available.
Once the liquidation process is complete, the liquidator calls a final meeting of shareholders and presents a final account of the liquidation for approval.
If you’re considering liquidation to wind up your solvent company, talk to our experts about your options. We’ll explain the choices available and help you make the right decision for your business.
Implications for stakeholders
Liquidation can have a significant impact on the people with an interest in the company.
For example, in the case of a compulsory liquidation or CVL, shareholders may lose some or all of their investment, employees risk job and income loss, and creditors face uncertainty about recovering debts.
With careful management, however, stakeholders can be kept abreast of what to expect, and when, so that unnecessary concerns are kept in check.
Liquidators try to make sure that employees are paid what they are owed, even if not immediately. If a company can’t meet its commitments to employees The Insolvency Service, part of the UK government, runs a scheme to help employees recoup wages. Your appointed Liquidator will lead this process for you.
As a company director thinking about liquidation, it could be seen as an unwelcome challenge. A commitment to transparency and responsible decision-making, however, will make the process much easier to manage.
Companies do have a duty to keep suppliers, customers, creditors and employees informed on the progress of the liquidation. Effective communication is crucial in order to manage both expectations and anxieties.
Your licensed insolvency practitioner will be a valuable source of support. We offer appropriate advice and guidance through the necessary legal and administrative procedures, and provide reassurance with practical steps at each stage.
Legal considerations
An understanding of the legal landscape in the UK is helpful when you’re navigating the liquidation process. Working with experts to navigate legal complexities such as contractual obligations and potential disputes is essential for companies undergoing liquidation.
For example Legal considerations might include contractual obligations, lease agreements and employee contracts. Companies must understand these existing contractual agreements to make sure they are compliant during liquidation and to mitigate any potential further liabilities.
Disputes can arise during the liquidation process, for example, from creditors seeking repayment or employees contesting contractual terms. This is important not just for peace of mind about obligations and liabilities, but also to limit challenges that can hold up the entire process.
Alternatives to liquidation
There are alternatives to liquidation that might help companies navigate financial challenges effectively and avoid closure.
Sometimes restructuring a business and its debt can be the answer. By reorganising operations, renegotiating contracts or deadlines and changing ownership structure, a company’s financial health can be revitalised. These alternatives might allow a company to continue trading but they can be complicated.
We can help you explore alternatives to liquidation and highlight the potential benefits and challenges of each. With expert support and advice, long-term viability for a business can sometimes be achieved.
Considering liquidation to close your company?
The decision to liquidate is an important one but sometimes it is the best option for a company. Understanding the pros and cons relative to your specific circumstances before making that decision is essential.
Our role as your licensed insolvency practitioner is to help you make the best decision for yourself, your business, and your creditors.
As a proactive company director, you can ensure that the liquidation process is as advantageous as possible for your company and all its stakeholders.
We guide you through the liquidation process efficiently and make sure you meet all your legal obligations. We also make sure that all stakeholders are treated fairly and that you benefit from any tax advantages available.
Ready to explore liquidation options or seek expert advice? Contact our team today to discuss your specific circumstances and chart the best course forward for your business.
To talk to a licensed insolvency practitioner and business rescue expert, call 0800 054 6580 or email [email protected]