The effects of liquidation on a business means that it will stop trading immediately. This not only impacts the reputation of shareholders in the market, but the stress and tension that comes with liquidation stays with the managers, shareholders and employees for years to come. Many businesses also choose voluntary liquidation when they are proven insolvent in the court.
In the liquidation process, the company is wound up and its assets are sold off. The reason for liquidation depends on the type of liquidation.
Let’s first understand the different types of liquidation:
Creditor’s Voluntary Liquidation
This is the most suitable type of liquidation for insolvent businesses, if there is no other option left other than liquidation. In creditor’s voluntary liquidation, directors of the insolvent company hire an insolvency practitioner who prepares a statement of affairs of the company and the creditors are contacted to pass a resolution for appointing an IP to wind up the company (usually the one who drew up the statement of affairs but not always). The IP then “liquidates” the business to pay off the creditors by chasing money owed, selling assets etc.
Members’ Voluntary Liquidation
In members’ voluntary liquidation, business members draft a statement of solvency based on its cash, asset and liability statements. The business enters liquidation only if it is able to pay the debts and liabilities for a period of 12 months. The business is then liquidated so that the members i.e shareholders can take the money out of the company as it has no further use. This is a tax efficient way of closing down a profitable business as the shareholders can claim entrepreneur’s relief
Compulsory Liquidation
Compulsory or involuntary liquidation is the worst type of liquidation. In this, the creditors send a statutory demand. If the business fails to respond to the notice, the creditors can take the case to court and file a petition for winding up the business. The court will then typically issue an order for evaluating the business’ insolvency and will order to wind it up if insolvency is proven. The official receiver is appointed, like a liquidator, and then seeks to sell any assets to pay back creditors. However it is unlikely that there are any funds left in the business.
Why are so many Businesses Liquidating?
The process of liquidation involves selling the business’ assets. Businesses initiate voluntary liquidation when insolvency becomes evident, and the business is left with no option other than liquidating. As mentioned earlier, directors need to liquidate as otherwise they could be charged of wrongful trading. Ie trading when there is no prospect of paying back creditors and making the situation worse.
If an insolvent business postpones liquidation, the debts will continue to grow, thereby putting the directors at an increased risk. If legal proceedings are initiated at this stage, the court may hold the directors liable and issue orders to use their personal assets for paying the creditors.
Many businesses are forcefully liquidated by the creditors. Many businesses therefore get in touch with financial experts to prevent liquidation. There will be cases where liquidation is inevitable, and thus needs to be dealt with accordingly. Whatever your case may be, conduct some research and reach out for help. If you’re looking for a place to turn to for advice, I would recommend looking at some of the guides on companyrescue.co.uk to gain a better understanding of the issue and assess what type of help you need.
How Can Businesses Avoid Compulsory Liquidation?
According to the Insolvency Act of 1986 and the Companies Act of 2006, creditors have to follow a specific procedure for requesting a business’s liquidation. This includes:
- Invoicing paperwork for proving debt
- Getting issue of County Court Judgment for proving unpaid debt
- Using CCJ to remove the goods at your workplace
- Getting a statutory demand – here the business is provided the opportunity to respond to the dispute within 18 days or pay the amount due within 21 days
- Getting a winding up petition approved by the court
- Sending a notice for winding up the business
HM revenue and Customs is the most common creditor to issue a winding up petition Also, the creditor needs to deposit £2,000 to the court as security.
Liquidation can be prevented in various ways, including the following:
- Settle the issue out of court with the creditor, before the creditor obtains a statutory demand.
- Pay the debts within 21 days of receiving statutory demand.
- Ask the court for adjournment, however, this is an unrealistic practise, as the court may dismiss your request for adjournment.
Speaking to an expert insolvency company is the safest way to handle your financial problems. These experts are not only aware of the complex processes involved in the liquidation of a company, but they also know different ways through which liquidation can be delayed or avoided entirely.
Sometimes, businesses face liquidation due to cash-flow problems. Your creditor might want to resolve the case outside of court to avoid depositing £2,000 in the court. Convince your creditor to extend your deadlines. After that, discuss the status of your business with a finance expert and incorporate techniques to improve cash-flow for getting rid of debts.
