Every day there are new businesses being set-up but there are also companies facing the unpleasant insolvency process. According to the Office of National Statistics, between 2016 and 2017, there were 382,000 new businesses but also 357,000 business deaths.
When a business fails, ie when it doesn’t have sufficient assets to cover its debts and cannot pay any debts on the due dates, it becomes insolvent and its directors have a few options:
- Get help from an authorised insolvency practitioner like Berley,
- Reach an informal agreement with its creditors,
- Enter into a company voluntary arrangement,
- Put the company into administration, or
- Liquidate or close down the company.
In this post, we look at liquidation, the legal way of closing down a business which may be solvent or insolvent, and the consequences.
Creditors’ voluntary liquidation
Creditors’ voluntary liquidation (CVL) happens when a director proposes that a company stop trading and be liquidated due to being insolvent (unable to pay off debts) and 75% (by value of shares) of shareholders agree to pass a ‘winding-up resolution’. When this happens, the company must follow these three steps:
- Appoint an authorised insolvency practitioner as liquidator to collect the company’s assets and distribute them to its creditors in accordance with the law,
- Send the ‘winding-up resolution’ to Companies House within 15 days and
- Advertise the resolution in The Gazette within 14 days.
The process of CVL is rather quick – the company stops trading, the employees are let go and the liquidator takes over – generally within two weeks. If you’re a director of a company that has entered CVL, technically you can start another business right away and you aren’t responsible to pay off the company’s debts (unless you have misappropriated company funds or you have signed personal guarantees). However, you cannot be involved with another company or other types of business with the same (or similar) name to the failed company.
Compulsory liquidation happens when a creditor, who is owed £750 or more, petitions the court to wind up a company through a ‘winding-up petition’. Before this can happen, the creditor must make a formal demand, aka statutory demand, first and if the company does not respond to the statutory demand within 21 days or dispute the debt, then the creditor can proceed to petition for a winding-up order. Once the court gives a winding-up order, an official receiver will be put in charge to liquidate the assets of the company and distribute to the creditors to pay debts. The process a compulsory liquidation usually takes two to three months, and once winding-up is complete, the company will be dissolved.
Members’ voluntary liquidation
Members’ voluntary liquidation (MVL) is a quick and tax-efficient way to liquidate a company that is solvent but the directors have chosen not to run the company any more. As there are strict processes to follow, it is best you consult an accountant and an independent insolvency practitioner first.
Whether it is creditors’ voluntary liquidation, compulsory liquidation or members’ voluntary liquidation, you need an authorised corporate insolvency practitioner who is impartial, ethical and who acts in accordance to the best practice guidelines issued by the appropriate bodies. So give us a call on 020 7788 8261 today. The first consultancy is free, as it allows us to understand your circumstance and explain the options you have.
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This post is intended to provide information of general interest about current business/ accounting issues. It should not replace professional advice tailored to your specific circumstances.