If you are a company director of a business that is finding it difficult to trade or needs to cease trading, you may be unsure what to do next.
Generally, there are two tests to see if a company is insolvent. The first is to ask: can the company pay its debts as and when they fall due? The second is to ask whether the company’s liabilities exceed its assets. If the answer to either question is yes, you are dealing with an insolvent company and must take action quickly.
There are many different approaches that could rescue your business and restore it to solvency, if you respond proactively when challenges arise, but in some cases, Voluntary Liquidation may be the only viable solution. This may be a scary prospect for many company directors, especially if they do not understand the liquidation process or the potential outcomes. However, this can bring an end to money problems and prevent legal action against you, so in many ways, it can come as a relief.
Here, the experts at Company Insolvency Advice explain the Voluntary Liquidation process, detail the circumstances under which it may be necessary, and outline what you can do to avoid this situation. If you are concerned about your business’ financial position, contact us today for free, confidential advice and support. Call us today on 0800 999 0666 or use our online enquiry form to arrange a call back.
When company directors notice a financial problem, the first step should usually be to take advice from a third party to answer their questions and concerns.
The third party could be any of the following insolvency experts:
- An online assistance business, such as Company Insolvency Advice.
- Their own accountant.
- A specialist insolvency accountant.
- A solicitor.
- An independent business advisor.
If the business’ directors and their advisor agree that Voluntary Liquidation is the most viable solution, the board of directors needs to instruct a licensed Insolvency Practitioner to assist them and begin the process.
Insolvency Practitioners will be able to explain the next steps in more detail, as these depend on a number of factors specific to each individual set of circumstances. There are several types of liquidation, but under these circumstances, the applicable process would be a “Creditors’ Voluntary Liquidation”. Another common type is the “Members’ Voluntary Liquidation”, which applies in situations where you can pay debts that your company owes, but you want to close it down anyway.
Company directors are often left feeling unsure or slightly bewildered when their business goes into Liquidation, so it is important to take time and care to understand what happens next. It is also vital to remember that, while it is never pleasant to consider Creditors’ Voluntary Liquidation of your business, this is often much better than Compulsory Liquidation. This can arise under circumstances in which one of your company’s creditors takes legal action against your business to recover a debt, by making a statutory demand for payment. If you do not pay, the creditor can then apply for a Winding-Up Petition, and if the Petition is granted, your company may be forced into Compulsory Liquidation by court order. Naturally, this can be extremely difficult to deal with.
This is just one reason why it is so important to act as soon as you notice a problem with your company’s financial position. A Winding-Up Order is rarely the best way for a creditor to get back their money, especially for unsecured creditors. Following Compulsory Liquidation, debts are paid in priority order, and unsecured creditors are low on this list, meaning that while they may receive a dividend, they are often unlikely to claim the full value of their debt. For this reason, outstanding creditors are typically incentivised to work with debtors to resolve company debts without resorting to legal demands.
Once the process formally begins, the directors have to agree the company cannot continue and intend to enter it into Liquidation. At this point, the company ceases trading and employees are made redundant, although company directors will remain in place initially.
The licensed Insolvency Practitioner will assist employees in making claims for any wages in lieu of notice, outstanding wages, unpaid holiday pay and any redundancy pay. They will become responsible for the process and will also manage communication between all the relevant parties – for example, the Insolvency Practitioner will suggest they handle all creditor enquiries, rather than the directors.
The directors of the company must not do anything that devalues the company’s assets, or worsens the position of the creditors while they remain in their positions. They must especially not take money or order goods they know will not be paid for.
On a practical basis, the appointed Insolvency Practitioner will need the assistance of the directors and key members of staff to obtain all the information that they need to be able to prepare a report on the company’s position that is sent to all creditors.
This will contain the following information:
- Creditors’ details (including names, addresses, and amounts due).
- Information about all the company’s assets (including debtors, stock, work-in-progress, and any physical assets).
- Extracts of the company’s last accounts.
- Details of HMRC accounts for PAYE and NI, VAT, Corporation Tax and CIS Tax.
In addition, the instructed Insolvency Practitioner will obtain all company statutory information. Using all of the above information, they will prepare a report for all creditors.
The Practitioner will assist in convening a Shareholders’ Meeting, during which the shareholders will agree on the appointment of a Liquidator. This is usually followed by a Meeting of Creditors, during which they will present their report. Creditors’ Meetings are most often held as virtual meetings. If creditors at a certain level make a request for a physical meeting, this must be granted, but it is fair to say that this is rare.
If a Liquidator has been chosen, the creditors will typically be given the opportunity to ratify the selection at this meeting; often, the Insolvency Practitioner, who has handled the case in the early stages, will take on this role. When the Liquidator has been appointed, the directors no longer hold office and all the company’s affairs are dealt with by the Liquidator.
Throughout the process, the directors will liaise with the licensed Insolvency Practitioner, who can give explanations of how the process works and what is involved. This can provide reassurance and help the Creditors’ Voluntary Liquidation to unfold as smoothly as possible.
The Liquidator will attempt to realise the company’s assets. As mentioned earlier, company directors will be made redundant at this stage and, in some cases, may be able to secure director redundancy pay.
At this point, directors will usually be free to move on. In most cases, there is nothing to prevent directors from starting a new business.
There are several different approaches you can take to resolve financial difficulties for an insolvent (or solvent) company, and this is just one reason that it is important to seek professional advice at the earliest opportunity. The team at Company Insolvency Advice has significant experience in providing this type of guidance and should be your first port of call if you are considering going into liquidation, or if you need any other support with corporate debt matters. Call us on 0800 999 0666 or use our online enquiry form to arrange a call back at a time that is convenient for you.