It’s a sad fact that not every startup turns out to be a successful business. Unexpected changes can happen along the way that can seriously affect your revenue, many of which are out of your control – for example, one of your biggest clients going into liquidation themselves or a market decline for your products or services.
In an ideal world, as soon as you notice you have a cash flow problem, you should seek help from insolvency practitioners, also known as liquidators, who can advise which route of administration will benefit you the most. If you are in a very tricky situation or other forms of administration have been exhausted, they will take you through the liquidation process.
What is liquidation?
Liquidation is a formal business closure. The company is dissolved and is taken off the companies register. As your business is closing, all employees are made redundant, and any final debt to creditors is written off as you cannot afford to pay them. All assets are sold.
If your creditors are threatening enforcement action, you may even be forced into compulsory liquidation, in which the courts are involved.
The typical steps taken
Around one month after the business has ceased to trade, a creditor’s meeting is held. The insolvency practitioner is officially appointed, and creditors are made aware of the situation and what steps will be taken next.
If you’re the director of the business, it will be your responsibility to gather any relevant documents that are needed for the liquidation process. This includes all information about the business, such as company books, accounts, employee records, and insurance documents. You’ll need to attend all meetings and hand over all company assets to the practitioner.
A formal report will be made by the practitioner to detail the process. All creditors have two months from the day of sending to dispute any terms.
The insolvency practitioner will then decide if a Creditors Voluntary Liquidation (CVL) or a Members Voluntary Liquidation (MVL) is the best route for the business.
A CVA is only available to insolvent companies, which are companies that can no longer afford to cover the day-to-day costs of running the business. If your liabilities outweigh your assets, you’re also insolvent.
It is the responsibility of the company directors to initiate a CVA. At least 75% of shareholders will then need to approve this decision.
An MVL, on the other hand, is only available to businesses that are solvent. If you are the owner of a solvent, sustainable business, this is an easy, tax-efficient way to close a company to free up funds. There are a few reasons a director may choose this route – perhaps they are retiring, or the company has fulfilled its purpose. It’s a good route to take for anyone who wants to save a lot of money on tax bills.
Once the form of liquidation is agreed upon, the director’s powers cease and the liquidator is now responsible for the business.
When liquidators take control
The first thing a liquidator will do is conduct a thorough investigation into the affairs of the business. This includes a full list of company assets, company books and records, and cash and book debts.
Directors must then provide a full list of creditors and their contact details. The insolvency practitioner will then formally notify all creditors that the company is going into liquidation and what will happen next.
Based on the list of provided assets, they will be independently valued and then realized for the creditors’ benefit.
Cash will typically be distributed in this order:
- The costs and expenses of liquidation are deducted – although many businesses fear this will mean even more debts to pay, the liquidation process itself can cover this cost in many cases.
- Voluntary liquidation costs are covered
- All other creditors are paid in a specific order until all money has been used up, starting with secured creditors (usually banks), preferential creditors (employees seeking holiday pay and redundancy payments), prescribed part creditors (an amount set aside from the companies’ net properties), secured creditors (stock) and finally, unsecured creditors, such as suppliers, customers, contractors, and any staff claims.
After this, the staff is made redundant. If any of them take out claims against the company, the insolvency practitioners will be responsible for dealing with this.
Investigations will also be made into the conduct of the directors. If you are seen to have knowingly gone past the point where you should have sought expert help due to cash flow issues, you can actually be charged with wrongful trading, meaning you can be disqualified from being a director again for 15 years.
Some directors choose to liquidate their company and start again from scratch, although various factors are considered during this process. Seeking advice from experienced practitioners can help you choose what path to take.
It’s surprisingly common for a business to close, followed by the setup of a new legal entity whereby the liquidated company’s assets continue. The liquidator may acquire assets for a fair value.
This can be seen in cases where the director set the business up as a limited company. Therefore they were protected from being personally liable for a percentage of the debts during insolvency. The limited liability framework protects directors who did the best they could to save the business but struggled due to difficult situations that they could not control.
However, after a business has gone insolvent, the director cannot become a director again if the business has a similar name and trades in the same sector for a period of five years. They also cannot promote, form, or market one either. If you do, you can be given a fine or even be sent to jail for breach of contract.
If you’re a director and notice you are having cash flow problems, seek help today – the earlier you do so, the better the outcome for both you and your creditors. Read more about company liquidation on Insolvency Expert’s site.