The Liquidation Procedures and Necessary Steps to Take

Many companies face financial issues at some stage on their natural life. You just need to look at the recent liquidations of some of the high street’s top shops, Toys r Us, Maplin, BHS, etc. For businesses facing significant cash flow problems, liquidation can become a very real threat. There are various procedures for liquidating a company: voluntary and compulsory. While voluntary liquidation may seem bleak, there are still opportunities for company directors. Business Rescue Expert, leading insolvency practitioners within the UK, are sharing their guide to the insolvency procedures, and what it may mean for your future as a director.

Voluntary Liquidation

Members voluntary liquidation (MVL) and Creditors Voluntary Liquidation (CVL) are two voluntary liquidation procedures, but with one primary difference. The MVL is entered into by companies still deemed as solvent, whereas the CVL refers to winding up an insolvent company. However, they offer more opportunities than that of compulsory liquidation, entered into due to creditors demands.

MVL process

The MVL, essentially, winds up and distributes the company assets, with the aim to raise cash in the most tax-efficient manner. You must note that this insolvency procedure will spell the end of your business, the final distributions of an MVL will be used as capital distributions, rather than profits. The proceeds of the MVL will go to the company shareholders, as opposed to creditors with a CVL.

Entering members voluntary liquidation will mean the notice will be published in The Gazette. However, this is not considered an insolvency procedure in the same way as a CVL – proposed by solvent companies – but it will still result in business closure.

CVL Process

Creditors voluntary liquidation is another voluntary liquidation procedure, initiated by directors and shareholders. This procedure is suitable as the company is unable to pay their debts, thus making it an insolvent company. This procedure will be carried out by a licensed insolvency practitioner (IP) – as will an MVL – and the IP will work to realise the company assets for the creditors. This procedure is designed for the benefit of the creditors and to recoup as much as possible.

Entering a CVL does have an advantage as it limits the threats of personal liability for directors. The procedure also helps avoid the ramifications of compulsory liquidation, which can significantly affect future opportunities for directors.

The main benefits to both are that you can discuss any issues with the insolvency practitioners, rather than under the orders of an official receiver.

Compulsory Liquidation

Compulsory liquidation is the opposite to voluntary liquidation, this time initiated through a court order. Your company is forced into liquidation through the submission of a winding-up petition, a severe threat to companies. A winding-up petition signifies the creditors have lost faith in your ability to repay your debts and would like the full closure of the business. This is a very costly procedure for creditors, and only entered into if all other avenues have been explored. It’s worth noting that your creditors need only to be owed £750 to submit the winding-up petition.

Similar to the above, the company insolvency will be placed in The Gazette, resulting in your company bank account being frozen. You will have 18 days to respond to the winding-up petition, but you will have received a statutory demand beforehand. You can dispute or pay the demand within 21 days, but you must not ignore the files. Doing so could result in further damage to your firm.

The compulsory liquidation procedure will result in the complete closure of your company. Directors will not be held accountable. However, they will if there is evidence of acting unlawfully or fraudulent trading, which will be thoroughly investigated during the procedure.

Starting a new company post-liquidation

Typically, you can be a director of as many companies as you would like, but you do owe duties to each business. It is common for businesses to close, but their branding, assets and trading continue under new legal entities. A pre-pack sale may be suitable for your company and offers a better chance of achieving a sustainable future.

Generally, directors are protected from personal liabilities should their company face insolvency. However, as mentioned above, if evidence of negligence of fraudulent trading occurs, this no longer stands. Personal guarantees also affects the protection.

The directors of a liquidated company, however, are prohibited from becoming a director of a similar company or becoming involved in the formation of a company under a registered or trading name, if they were acting director in the 12 month period from the company entering insolvency. This insolvency legislation is in force for five years, and is a criminal offence to breach.

There are restrictions on reusing company names to ensure directors are not continuing to run up debts, thus entering another liquidation procedure. However, exceptions to the rules include:

• Purchase of business: A similar name may be used if a company purchases the whole, or substantial, amount of a liquidated company. Shareholders must be notified of your intention to use a similar name.
• Court permission: You have acquired a court grant to use a similar name.
• Existing use: If your company, while trading, has been using a ‘prohibited name’ 12 months prior to the liquidation, you can use this.

Ultimately, liquidation is a very real scenario for your business, and you must seek immediate advice if you believe you are facing the early signs of insolvency.