Once a company is no longer required, or if its financial problems have taken it beyond the point of rescue, the business can be closed through a process known as liquidation. The way in which a limited company is liquidated will be determined by the financial state of the business – essentially whether it is solvent or insolvent.
If you are thinking of closing down your company (whether solvent or insolvent), the process begins with a resolution to ‘wind up’ the business. This decision is usually made by the shareholders and/or directors of the company, however, in the case of compulsory liquidation, the creditors of the company can petition the court for the liquidation.
A ‘winding up resolution’ leads to the liquidation of company assets by a licensed Insolvency Practitioner, with the intention of either repaying creditors or distributing the money realised to shareholders.
Directors can voluntarily wind up their company or creditors can take the initiative if they are owed a minimum debt of £750. This is done by petitioning the court for a compulsory winding up order.
Assuming that the company has no debts or is able to repay them in full before closure, the process followed is called a Members’ Voluntary Liquidation, or MVL. This is often used by directors wishing to retire, or by a group of companies that want to close down a defunct subsidiary.
Members’ Voluntary Liquidation
The MVL process
- Engage the services of a professional Insolvency Practitioner to advise and oversee the process
- Convene a board meeting to discuss voluntary liquidation as an option
- The majority of directors sign a Declaration of Solvency – this is confirmation that the company can repay all its debts within 12 months of the liquidation date
- A Liquidator is appointed at an Extraordinary General Meeting with shareholders, at which a resolution is passed to wind up the company if 75% of shareholders (by value) are in agreement
- The Liquidator sells company assets, pays all creditors in full and distributes any remaining capital amongst shareholders
Creditors' Voluntary Liquidation (CVL)
The Creditors’ Voluntary Liquidation process also involves voting a resolution to wind up the company. In this instance, however, the reason is to avoid further debts and minimise further losses to creditors.
Trading while knowingly insolvent carries with it a risk of disqualification as a director, financial penalties, and a prison sentence in the more serious cases. It is important therefore, to recognise when there is no hope of business recovery, and to put creditor interests above those of the shareholders.
The CVL process is as follows:
- A meeting of shareholders is called, during which 75% (by value) need to agree to pass a winding up resolution
- A licensed Insolvency Practitioner is officially appointed to liquidate the company
- The winding up resolution is sent to Companies House, and also advertised in the Gazette
- A creditors’ meeting is held within 14 days of the resolution. This meeting must also be advertised in the Gazette
- A Statement of Affairs is presented at the creditors’ meeting, detailing the company’s financial position. This will also be sent to Companies House.
During the liquidation process, creditor interests take precedence over those of directors, shareholders and members. Directors must act with integrity and are obliged to provide the IP with all the information needed to carry out this process.
Compulsory Liquidation occurs when action by creditors forces a company to close down. Any creditor can apply to the court for a winding up order if they have sent a 21-day Statutory Demand for a debt of more than £750 which remains unpaid.
Once passed by the court, a winding up order seals the fate of a company delinquent on payments to secured or unsecured creditors.
Compulsory Liquidation process
- A Statutory Demand is sent to your company for payment within 21 days
- If this remains unpaid, the creditor can petition the court for a winding up order
- You have seven days in which to take action to prevent the liquidation of your company
- Once the winding up petition is advertised in the Gazette, your company bank accounts will be frozen
- The ensuing winding up order essentially means the end of your business
- Company assets are liquidated to repay creditors
There are several issues that directors need to take into account when their company is liquidated in this way:
- Timing – waiting for a creditor to issue a winding up petition can be a lengthy process. Creditors must pay to do this so they are only likely to take this step as a last resort. While waiting for your company to be wound up you are running the risk of accumulating further debts and are likely to experience ongoing creditor pressure
- Impact of employees - If you have staff you should remember that they are only able to claim redundancy and other statutory entitlements once the company is liquidated. By holding off on initiating this process voluntarily and waiting for a creditor to wind you up, you are delaying your employees receiving the redundancy they are entitled to
- Responsibility to creditors - As the director of an insolvent company you have various legal duties; one of these is to put the interests of your creditors first and to not partake in any behaviour which may worsen their position. Seeking the advice of a licensed insolvency practitioner during the early stages of your company's insolvency can help you adhere to these responsibilities and prevent further losses.
The liquidator is obliged to investigate the conduct of directors as part of any liquidation process. A report is sent to the Secretary of State detailing any concerns regarding their conduct during the time leading up to the company becoming insolvent.