Is liquidation right for you?

If you are company is struggling to trade and pay its debts when they become due, and you discover that your assets are worth less than your debts, then your company is insolvent. If this is the case, unless you can come to an arrangement with your creditors then the company may need to go into liquidation. This is where the assets of a company are sold off to try and pay off creditors.  

Types of liquidation 

There are three main sorts of liquidation:  

• Creditors' voluntary liquidation. If a company becomes unable to pay its debts and no arrangement or period of administration is likely to save it, a director can propose a creditors' voluntary liquidation. The company must pass a resolution that the company cannot continue and then call a meeting of the creditors. The creditors will appoint a liquidator who will conduct the winding up of the company.
• Members' voluntary liquidation. This occurs where the company is still solvent (i.e. has enough assets to cover its liabilities) but the shareholders decide to put the company into liquidation anyway, often because they are not confident that the business will prosper in future and they prefer to cut their losses.
• Compulsory liquidation. This is a common debt-collection ploy and occurs where a creditor or a group of creditors who are owed more than a certain amount of money. They can ask their solicitor to go to court to apply for a winding up order. If this goes ahead and there are enough assets, the official receiver will call a first meeting of creditors to appoint an insolvency practitioner as liquidator. The business will be wound up and its assets sold off to pay the creditors.

Benefits of liquidation

For many company directors, liquidation can be beneficial, allowing them to escape from a troubled company debt-free (apart from loans you have personally guaranteed) and either start another business or even buy back the assets of the liquidated company and carry on with a clean slate. Liquidation is probably your best option if:

• Your business is insolvent and will be for the foreseeable future.
• There is no way that you can repay your creditors with the business in its present form.
• You would like to start the company debt free as part of a recovery procedure.
• You are fed up and want out.

Alternatives to liquidation

Informal arrangement

If you want to save the company in its present form, you still have money coming in and you predict that matters will improve in the future it might be best to put formal procedures on hold and get in touch with your creditors to try to negotiate some sort of alternative repayment scheme, giving you more time to pay up. It’s a good idea to include a timetable of when payments will be made. 

Company voluntary agreement

Similar in some ways to an informal arrangement, a company voluntary agreement involves bringing in the services of a registered Insolvency Practitioner (IP) - who specialises in advising failing companies – to negotiate with the creditors and hammer out an agreement on how you will repay your debts. The IP will call a creditors’ meeting to present your repayment plan and if 75% of creditor (by value) s vote for the arrangement, it is binding on all parties. Once agreement is reached, it is formalised by the court.  

Administration

Administration is a procedure which allows a company to ask the court for a certain amount of time during which creditors are barred from taking action against it to recover their cash. During this period, the company will be administered by an IP whose priority will be to rescue the company if possible. If this isn’t feasible, the IP must try and get as good a deal for the creditors as possible, which may entail selling off the business, or its assets, to pay off the company’s debts. 

Administrative receivership

A secured creditor can ask that an administrative receiver be appointed to recover the money owed to them by a limited company. The administrative receiver – who is an Insolvency Practitioner – takes control of the business and may sell the assets off, or sell the whole business as a going concern to pay off the secured creditor and cover the costs of the receivership. 

Duties of directors

If you are a director and you know your company has big financial problems you need to make an early decision about whether to continue trading. If you do carry on, even though you knew the company had no realistic chance of avoiding liquidation, you can be found personally liable for wrongful trading (trading while the company is insolvent), if the company goes into liquidation. You can also be held personally liable for any personal guarantees made and criminally and personally liable for fraudulent trading, (deceiving creditors), if the company goes into liquidation.