Company Liquidation: What Are Your Options?
What is the liquidation of a company?
Liquidation is a term many business owners dread.
But while it may be feared, company liquidation is very common.
Liquidation is where a company uses its assets to pay off its debts. To go into more detail, the assets from the business are ‘liquidated’ or turned into cash for the creditors and shareholders.
This means the business is brought to an end as the assets are distributed to claimants.
A company will usually go through liquidation when it is insolvent.
If you aren’t familiar with insolvency, it can be defined as the state a business is in where they cannot pay their obligations on time.
If you are a business owner, it is important to know and understand the different types of liquidation that can happen to a business.
While we will go into more detail of the types of liquidation further down in the article, here is a quick summary of each one:
While many people dream of having a successful business, the reality is; many businesses fail. In fact, it is more common for businesses to fail than it is for businesses to succeed.
So, what would happen to your business if you couldn’t keep up with the costs? What would be the best way to go about doing damage control?
Is there anything a business owner can do if they cannot pay their debts on time?
Company liquidation may be the answer to all of those questions. Keep on reading to find out everything you need to know about company liquidation!
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What happens when a company goes into liquidation?
So, you now have a better understanding of company liquidation. But what does the process actually look like?
Well, it depends on the type of liquidation.
First, let’s breakdown Creditors Voluntary Liquidation.
Creditors Voluntary Liquidation
If you are a director and your business cannot pay its debts, providing the shareholders agree with your decision, you can propose a Creditors’ Voluntary Liquidation.
As the business owner, you will need to ensure you can demonstrate, to the creditors, that liquidating your business is the best action to take in this situation.
When the CVL is accepted, your company will cease trading, liquidation will begin and its assets will be distributed to the appropriate creditors.
If your company is insolvent, a CVL will be the best route to go down for liquidation. This is due to the fact that CVL is a voluntary process on your part.
Members Voluntary Liquidation
A Creditors Voluntary Liquidation will not be right for every business, so it’s always good to look at the alternatives out there.
A Members Voluntary Liquidation is another form of Liquidation that allows shareholders of a business to appoint a Liquidator to close down a solvent company.
In a Members Voluntary Liquidation, once the liquidator has ensured there are no outstanding payments, they will release the remaining assets to the business’s shareholders.
So, what are the benefits of going with a Member's Voluntary Liquidation?
In short, an MVL can be the most tax-efficient way of liquidating your company. Of course, this all depends on how much cash there is in your business.
The shareholder distributions from an MVL will be treated as capital distributions, meaning that the tax on this is much lower than standard dividends.
Not only this but shareholders may also benefit from Entrepreneurs Relief - a government scheme that allows reduced capital Gains Tax of 10% on all qualifying assets.
Compulsory Liquidation
Now we’ve covered Members Voluntary Liquidation and Creditors Voluntary Liquidation, let’s talk about Compulsory Liquidation.
Compulsory Liquidation is a formal insolvency procedure. This type of liquidation happens when a creditor attempts to force your business to close in order to recoup debts that are owed by your company.
In order for a creditor to issue a winding-up petition, a company must owe more than £750 to the creditors.
If you aren’t familiar with winding-up petitions, you can read more about them in our blog here.
Once a winding-up petition has been issued, if accepted, the court will issue a winding-up order. As trading will come to a halt, an official receiver will be appointed who will then take control of your company.
The official receiver will then proceed to liquidate the company's assets, which will then be ring-fenced by the official receiver to repay the creditors.
After the company's assets have been sold, the company will be officially dissolved and removed from the register at Companies House.
It is worth noting, if any debts remain outstanding at this point, they will be written off unless one of the directors has a personal guarantee.
Can I be a director of another company after the liquidation of a previous one?
The short answer is yes but it all depends on your situation.
For example, let’s say you are a company director and your business has just gone into liquidation.
If the liquidator/official receiver of your company feels that your conduct was unfit, you can be banned from being a director of other companies for 2 to 15 years.
If you have just gone through liquidation, compulsory or CVL, you will be banned for 5 years from forming, managing and promoting businesses that have the same or a similar name to your liquidated company.
However, there may be some exceptions to this such as:
If you need help or advice on Company Liquidations then contact Anderson Brookes Today! Alternatively fill in the form below and a member of our team will be in touch!