What is Company Liquidation?

There’s a point at which you finally decide that you have to liquidate your company. If the debts are not payable and you cannot pay your employees, you may feel that you have no option. It’s tempting to just go online and start the liquidation process. But to protect yourself as a director and to make sure you have a future in business, you need to make sure that you choose the correct type of liquidation process.

In a company liquidation, you have to eansure that you do everything you should do, nothing you shouldn’t, and that you do things in time. An Insolvency Practitioner (IP) will be able to explain the different types of liquidation to you. They can help you to decide which is the most appropriate, given the particular type of business you have and the specific difficulties the company is experiencing.

There are many services which will offer you help in achieving a fast liquidation. But you need to choose one which will help you to achieve the liquidation which is most beneficial and least disadvantageous to you, both as an individual and a director.

What happens in a liquidation?

When you liquidate your company, you agree that what it owns (its assets) will be used to pay off its debts. If there’s money left over after this, it will go to the shareholders. Once you decide to liquidate your company, you will need a validation order if you want to access the company’s bank account.

Let’s take a look at the different types of liquidation that are available to you. These are Creditors’ Voluntary Liquidation (CVL), Members’ Voluntary Liquidation (MVL) which is also known as also known as a Company Voluntary Liquidation. And lastly, the worst option: Compulsory Liquidation.

Creditors Voluntary Liquidation (CVL)

As a director, you can decide to liquidate your company via a CVL, provided that enough of the shareholders agree. The reason for liquidating your company in this way will be that it’s insolvent and cannot pay its debts. The company will stop trading and be wound up. But the important thing is that you have taken the initiative and managed the situation. It’s far better than waiting for someone to whom you owe money to take out a winding-up petition against the company. If that happens, a lot of the freedom to act is taken away from you.

You need 75% of the shareholders to agree to the CVL. You need to call a shareholders’ meeting and take a vote on the resolution to wind the company up. You need to make a formal record, such as written meeting minutes of the meeting, the resolution and the vote. This winding-up resolution leads to three immediate steps.

First you have to appoint an Insolvency Practitioner (IP) to take over as the person in charge of running the company while it is being liquidated, “the liquidator”.

Once you have appointed the IP, your directors’ responsibilities are different. The IP is now in charge of running the company. You no longer have any control over the company or its assets or cash. You can no longer act for the company, or do anything on its behalf.

The IP will probably discuss other possible options that might allow the company to stay afloat, such as a Company Voluntary Arrangement (CVA) in which the company’s debt is restructured to allow it to pay its creditors on a payment plan. However, if the directors want to wind up the company, the next step is the creditors’ meeting.

CVL – Creditors’ meeting:

The creditors need to be given 7 days’ notice of the meeting and it has to be advertised in The Gazette (the official business journal). The meeting must take place within 14 days of the resolution to wind up the company and all of the creditors, plus either a director, the liquidator or the company secretary must be present.

This is bound to be a difficult meeting but if approached honestly and openly, it can be constructive. You have to produce a “statement of affairs” which sets out company’s trading position, its financial status and any assets it has. There are set forms which have to be used, but your IP can advise on this. After the meeting, the statement goes to the liquidator (or IP) who sends it on to Companies House.

CVL – Co-operating with the IP or liquidator:

As a Director, you have to give the IP or liquidator any company records, paperwork or information that they ask you for. If they want to interview you, you’ll need to make yourself available. And you’ll need to hand over the company’s assets. In a CVL, you have to remember that the liquidator acts in the interest of the creditors not the directors, although they will aim to be fair to all parties.

It’s important to play ball with the liquidator because if they decide your conduct wasn’t fitting, you can face a ban on being a director of up to 15 years. This tends to happen only in the worst cases of knowingly irresponsible conduct by a director.

Members’ Voluntary Liquidation (MVL)

This is the option for company directors of solvent companies who want to enjoy life a little more and worry a little less. Typical reasons for this chosen path are that the director wants to cash in the company funds and retire.

Entrepreneur’s Relief:

In the 2016 budget the government extended the entrepreneur’s tax relief facility. This applies to long term investors who are invested in unlisted companies. It reduces capital gains tax to just 10% on gains made on new shares bought after 17th March 2016, provided that they’re held for three years. There is a lifetime limit of £10m for the relief. The budget also included a number of measures that allow relief on goodwill and other aspects of incorporation.

These extensions have been backdated, and in addition to helping retirees, they can make it far easier to hand on a business as a going concern to the next generation. The transfer of farms will certainly be considerably easier. This relief can significantly reduce the cost of carrying out an MVL and turn it into a sensible tax-planning move.

The majority of the directors must sign a declaration that the company is solvent. The shareholders are then given at least five weeks’ notice of a general meeting. At the meeting a resolution is passed to say that the company will be wound up voluntarily. And as usual, the resolution must be advertised in The Gazette, this time within fourteen days of the shareholders’ meeting.

As part of the process, the company needs to appoint a licensed IP to act as the liquidator; they will wind up the company for the members. Remember to send the signed form to Companies House no more than 15 days after you pass the resolution.

The IP will first settle all the company’s tax bills, making sure that HMRC has been fully paid. As liquidator, they will settle any outstanding business, such as contracts that are still running. They’ll make sure that the company’s assets are sold and that the creditors are fully paid. They’ll also help to ensure that all the right paperwork goes to the right places, to keep the authorities in the loop as to what’s happening.

They will then close the company down and pay out the shareholder funds to the shareholders. Because this creates an immediate capital gain, the entrepreneur’s relief is a vital part of tax planning when considering an MVL.

Finally, the IP will get the company removed from the companies register.

Serial entrepreneurs:

A legitimate reason for closing a company, paying out the funds and claiming entrepreneur’s relief, may be that the Director has a better business opportunity and wants to release funds for another business. This is allowed but there are strict regulations about liquidating the company, claiming the relief then setting up an almost identical company.

The Chancellor has made reference to “contrived” schemes, some of them used in the property development sector. In these schemes, money is distributed from one company, without a taxable dividend having been paid, and then a “phoenix company” rises out of the ashes of the previous company.

The IP is the best person to advise as to how to shut down your company legally and tidily, and how you can restart in business without breaching any of the restrictions that are in place.

Compulsory Liquidation

This is the least favourable option because you, as Director, have minimal control over the process and are likely to suffer the worst consequences. It often happens because things are left to run on for too long, when the employment of an Insolvency Practitioner (IP) could have helped you identify other, better, options.

Compulsory liquidation is often the result of the company having debts that it cannot repay. This leads to one or more of the creditors applying for a winding-up order, often after going through the courts to get a county court judgement against the company for debt. As soon as a petition for the winding-up order is entered, you have to stop trading and your bank account is frozen.

The winding-up order can only be issued if the debt is more than £750 and the creditor has already tried to get the debt repaid using other means, such as the court system.

When the court decides to wind up a company, they appoint a liquidator and an Official Receiver. These officers start measuring up the company’s assets with a view to selling them. The creditors can meet and appoint a different liquidator if they wish. The outcomes of compulsory liquidation can be negative for you as a director, so your best bet is to get advice from an IP as soon as possible as to how to limit the negative consequences.

Three months after a compulsory liquidation, the company ceases and is struck off the list of companies at Companies House. The only way to stop this process is to get the creditors to agree that they are satisfied. There are several ways to do this, and you don’t necessarily have to pay off the whole of the debt owed. Creditors may allow you to set up a payment schedule which will allow the company to continue trading.

A qualified and experienced IP knows all of the options that are available to your company. But it’s essential to get the IP in early while you still have options. Leave it until later, and the options begin to close down.