For many business owners, if they are thinking about liquidation, the decision to liquidate is one of the toughest they’ll ever face. Whether financial pressures have become insurmountable or it’s simply time to step away, understanding the process and its implications is crucial. Before making the final call, there are a number of key factors to think about.
What is the right type of Liquidation?
Liquidation isn’t a one-size-fits-all procedure. Depending on the circumstances, the best approach could be:
Creditors’ Voluntary Liquidation (CVL)
If the Company is insolvent and cannot pay its debts, a CVL allows the Directors to take control of starting the process, rather than waiting for creditors to force the business into Compulsory Liquidation.
Members’ Voluntary Liquidation (MVL)
If the Company is solvent but it needs to be closed, an MVL is a tax-efficient way to distribute the remaining assets to shareholders.
Compulsory Liquidation
If creditors take legal action to collect unpaid debts, the Court can force the Company into Liquidation.
Understanding which type of Liquidation applies to the Company’s circumstances should help to make sure that the right steps are taken and that potential legal and financial risks are minimised.
Financial & Legal Considerations
Liquidation affects not only the Company itself, but also its Directors and its various stakeholders. Key issues include:
1. Debts and personal liability
If the Company is insolvent, how much is owed to creditors, how much they might get back and whether personal guarantees or other personal liabilities could come into play.
2. Director responsibilities
Once insolvency is evident, the Directors must act in the best interests of creditors to avoid accusations of Wrongful Trading or other breaches of their fiduciary duties.
3. Employee rights
Staff may be entitled to redundancy payments and other financial support if Liquidation proceeds.
4. Tax implications
Closing a business can trigger various tax considerations, including Capital Gains Tax and VAT responsibilities. Consulting a tax specialist can prevent unpleasant surprises.
5. Books & records
One of the most common complaints against Directors after a Company has gone into Liquidation is that the books and records were inadequate or not up to date. It’s worth seeing what can be done to remedy this problem before starting the Liquidation process.
The Liquidation process and costs
Liquidation requires that one or more licensed Insolvency Practitioners (IP) are appointed as the Liquidator to manage the process. The fees for Liquidation vary depending on the complexity of the case. Key stages in the procedure include:
1. Appointing an Insolvency Practitioner
The IP will oversee asset sales and debt resolution, as well as compliance with all the necessary legal formalities.
2. Asset distribution
The Company’s assets will be sold to repay creditors as much of their debt as possible.
3. Company dissolution
Once the Liquidation is complete, the Company will eventually be dissolved and removed from the Companies House register.
After the Liquidation
While Liquidation may signal the end of a particular Company and its business, this doesn’t have to be the end of the entrepreneurial journey. Some Directors go on to start new ventures with lessons learned, but it is important to note that there are strict rules against the re-use of the liquidated Company’s name without first getting Court permission.
What are the alternatives to Liquidation?
Before committing to starting a liquidation, other rescue options need to be considered:
Company Voluntary Arrangement (CVA)
A CVA is essentially a deal between a Company and its creditors, which can allow debts to be restructure, while the business keeps trading.
Moratorium
This is a short term breathing space, which can be crucial in situations where there is a solution to the Company’s problems which can be implemented in the near future but not immediately.
Administration
The Administration procedure ring fences a Company and its business from enforcement action by creditors, while it implements a turnaround strategy.
Scheme of Arrangement or Restructuring Plan
These are complex Court-driven procedures, which are usually used to deal with complex financial issues at larger businesses.
Time-to-Pay Arrangements (TTP)
HMRC may allow a structured repayment plan, known as TTP, for tax debts, where this is the core problem facing a Company.
Acting early
Exploring liquidation alternatives first could provide a more strategic and beneficial exit than an immediate shutdown and Liquidation. However, Liquidation can be a necessary step for some businesses, but it’s important to seek expert guidance to ensure that an informed choice is made on the basis of all the available facts.
Whether navigating insolvency or simply winding down, taking time to understand the process can protect the interests of all stakeholders to the maximum extent possible. Getting this advice as soon as problems are identified is and acting on it without delay is essential. The earlier this is done, the better the outcome.
At Opus, we have extensive experience assisting business owners and directors with concerns and challenges, and we will always work with you to find the best solution for you and your business. If you would like to speak to Opus, one of our Partners would be more than happy to have a non-obligatory, confidential chat with you. We can be contacted at rescue@opusllp.com or call us on 0203 995 6380 and we will arrange for a call with one of our specialists.