- Is Your Business at Risk?
- Understanding compulsory and voluntary liquidation
- What happens during a company liquidation?
- What is compulsory liquidation?
- Could your company’s creditors force compulsory liquidation?
- The risks of compulsory liquidation
- What is voluntary liquidation?
- What is the voluntary liquidation process?
- What is Members’ Voluntary Liquidation?
- Could you face wrongful trading charges?
- Can you start another similar company?
Is Your Business at Risk?
Has your company been served with a winding up petition by its creditors? If your company has significant debts that haven’t been repaid after receiving a statutory payment demand, it could be forced into compulsory liquidation.
Compulsory liquidation is a legal process by which your company’s creditors can force it to close and have its assets liquidated. The liquidation of company assets, typically by a creditor-appointed liquidator, is used to repay your creditors.
The process of liquidating your company involves several steps, and you will have several opportunities to end the process while it occurs. If you can’t afford to pay your creditors immediately, you can also propose an alternative solution.
Understanding compulsory and voluntary liquidation
When your company’s debts are too great to repay and its creditors are pressuring you with the threat of compulsory liquidation, winding up voluntarily could be your best option.
Company liquidation allows you to wind up your company and put an end to all of the stress of dealing with demanding creditors. It allows you to limit the risk of personal liability and ensure the pressure on your company comes to an end.
There are several different types of company liquidation, each of which places your company in a different legal position. The three types of company liquidation in the UK are:
- Creditors’ Voluntary Liquidation (CVL), which is the most frequently used form of company liquidation in the UK. A CVL involves a company ending operations and selling its assets to repay creditors.
- Members’ Voluntary Liquidation (MVL), which is when the shareholders of the company, which is still legally solvent, voluntarily wind up the company and repay its creditors using company assets.
- Compulsory Liquidation, which occurs when one of more or your company’s creditors file a winding up petition with the courts. This form of liquidation is the most legally difficult for the company’s directors and shareholders.
Company liquidation will mean the end of your company, as its assets will then be liquidated (sold in order to raise cash) to repay creditors. If your company is still commercially viable, an alternative option (such as a CVA) may be a better choice.
What happens during a company liquidation?
All forms of liquidation result in the end of your company. In a CVL or compulsory liquidation, your company’s assets are sold on a ‘forced sale’ basis to raise funds and repay the company’s creditors.
In a MVL, your company’s assets are liquidated in order to repay its creditors and, as the business is still solvent, allow shareholders to extract value from the company in the form of a lump sum payment.
What is compulsory liquidation?
If your company is severely indebted and unable to repay its creditors, it faces the risk of being sent a statutory payment demand. A statutory demand is a last notice for your company to pay its creditors before legal action is pursued.
Should your company fail to respond to the statutory demand and pay its creditors, the creditor can file a winding up petition to the High Court. If undisputed, this can lead to a winding up order being issued, forcing your company to be liquidated.
Compulsory liquidation is generally the least preferable form of liquidation. Compulsory liquidation suggests that the directors have not taken the appropriate action when they ought to have done, increasing the chances of a claim for wrongful trading.
In order to file a winding up petition against your company and initiate compulsory liquidation, a creditor needs to be owed a sum in excess of £750. There are many ways to stop or block a winding up order from being issued that a solicitor can assist you with.
Could your company’s creditors force compulsory liquidation?
Creditors can issue a winding up petition – a legal document seeking the liquidation of your company – if they are owed more than £750 and have not been repaid upon issuing a statutory payment demand to your company.
Your company’s creditors can also present a winding up petition if they have an unpaid County Court Judgement (CCJ). If the winding up order is granted, the Official Receiver will be appointed liquidator and your company’s assets will be liquidated in order to repay its creditors.
Entering into compulsory liquidation is generally not desirable for your company. Most companies facing a threat of compulsory liquidation choose alternative options.
These options include Company Voluntary Arrangement (CVA), which is a legally binding agreement between the company and its creditors to repay its debts over a certain period of time. Others enter into administration or Voluntary Liquidation.
The risks of compulsory liquidation
Compulsory liquidation results in the closure of your company and the liquidation of its assets in order to compensate creditors. In some cases, it can also lead to charges against you and other company directors.
Since compulsory liquidation is often a natural consequence of insolvency, charges of wrongful trading may stem from you and other directors failing to respond when you became aware that your company was insolvent.
Any insolvent liquidation requires the Liquidator to undertake an investigation into the company’s affairs. In a Compulsory Liquidation this investigation in undertaken by the Official Receiver.
If your company has an overdrawn director’s loan account, you could also be held personally liable for its balance. Director’s loans are viewed as company assets by liquidators and will be pursued as unpaid debts that are required to be repaid.
This can often leave you personally liable for a large sum, forcing the sale of a car, home or other significant assets.
What is voluntary liquidation?
Most people associate the word “liquidation” with the forced closure of a company and sale of its assets due to a court order. Not all company liquidations are forced; many are the result of company directors deciding to close down their business.
Voluntary liquidation is when a company’s directors make the decision to close the company down and liquidate its assets. Creditors’ voluntary liquidation is the UK’s most common form of company liquidation, with over 13,000 cases every year.
Creditors’ voluntary liquidation is usually only initiated if your company is no longer viable. If your company is viable but is currently experiencing a cash flow crisis or a temporary setback, other solutions – such as a CVA – may be more appropriate.
Liquidation is typically inexpensive and straightforward, and if you, as the company director, have acted responsibly and lawfully during the company’s operation, there is very little chance of wrongful trading charges being an issue.
What is the voluntary liquidation process?
The voluntary liquidation process is straightforward and simple. The first step is to speak to a licenced insolvency practitioner.
The insolvency practitioner will examine your company’s financial situation and see if voluntary liquidation is the most appropriate solution. In order to begin company liquidation, all directors will need to agree to the CVL process. During this process, if directors disagree about liquidation being the most suitable course of action for the company, the insolvency practitioner may suggest a CVA – company voluntary arrangement or pre-pack administration solution.
Once the voluntary liquidation process has been initiated, a meeting is held between your company’s directors, its creditors and the liquidator. Your creditors may want to appoint their own liquidator to manage the sale of your company’s assets. Following this meeting, the appointed liquidator will begin the process of selling the company’s assets in order to repay its creditors. The liquidation process can involve recovering unpaid debts and other amounts of money owed to the company.
CVL is the most popular form of company liquidation in the UK. By directors taking the positive step of initiating a creditors voluntary liquidation when they know the company is in financial difficulty, it reduces the risk of being accused of wrongful trading. Although a CVL will result in the end of your company, it gives you a greater level of involvement during the process of liquidation. Your company’s directors will have the professional assistance of an insolvency practitioner throughout the process.
What is Members’ Voluntary Liquidation?
While compulsory liquidation is initiated by creditors to close an insolvent company and a CVL is initiated by directors to liquidate an insolvent company, a MVL – members’ voluntary liquidation – is used to liquidate a solvent company.
In order to initiate the MVL process, the company’s directors and shareholders need to indicate that the company is solvent and capable of repaying its creditors within a 12 month period following the launch of the MVL process.
There are several reasons to start a members’ voluntary liquidation. One of the most common is to transfer assets from the company to its shareholders without facing a significant tax burden, which is often the case when extracting value via dividends.
In many cases, an MVL is the most tax-efficient way to liquidate your company and extract its assets, even if it is not under pressure from creditors. For example, an MVL may allow you to extract company assets at a lower tax rate for retirement.
Could you face wrongful trading charges?
In most cases, the process of company liquidation is straightforward, with creditors receiving some or all of the amount that they are owed following the liquidation of the company’s assets.
However, if you or any of the company’s other founders have acted wrongfully while the company was trading or failed to fulfil your duties as directors, wrongful trading charges could be initiated.
If you or other company directors are found guilty of wrongful trading following the voluntary liquidation of your company, there is a possibility of you being held liable for a percentage of the company’s debts. Being found guilty of wrongful trading can also result in you and any other company directors being banned from becoming directors of other UK companies for as much as 15 years.
While wrongful trading charges are a possibility in any company liquidation case, it is far more common for serious charges to result from compulsory liquidation than from the voluntary liquidation of a limited company.
Can you start another similar company?
Although it’s possible to initiate voluntary liquidation and start a similar company after your old business has been liquidated, you will face serious restrictions.
If you believe that your business is viable but want to shut down for a “fresh start”, voluntary liquidation is rarely the best solution. Other options, including prepack administration, are better suited to restarting a struggling but viable company.
The company liquidation process can be complicated and stressful, particularly in the event of compulsory liquidation initiated by a creditor. It can also be relatively straightforward in the case of a CVL or MVL.