When Should You Liquidate Your Limited Company?

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There are numerous reasons why you may be considering liquidating your company or business. Perhaps your company’s financial problems make trade impossible, or perhaps demand for your company’s products or services is dwindling, and you’re concerned about the future. Alternatively, if your business is no longer needed, such as due to retirement or a change in professional path, you may decide to liquidate it.

If your company’s financial situation is grave, you could opt for liquidation of your company. However, a liquidation can cost a lot of money, sometimes thousands of pounds. But what if you don’t have any money and neither does your company? Below we explain how to liquidate a company that has no money or assets.

What is liquidation and when does it take place?

In simple terms, liquidation is the process of bringing a company to an end. When the procedure is finished, the company will be officially closed, and its assets allocated to claimants. Whether the company is solvent, or insolvent will determine how assets are distributed.

Liquidation occurs when a limited company has reached a stage when it has been decided that the business will not continue for one reason or another. In this instance, you may want to consider liquidation of your business, which involves turning your assets into cash.

Assets are often converted to cash in order to pay off a company’s existing debts. These debts could stem from creditors’ investments in the business or loans taken out to help the business expand, for example.

Liquidation requires the company’s dissolution and the cessation of all operations. It’s a way for a company that has run out of cash to pay off any outstanding debts.

Why would a company liquidate?

The main reason a business would go down the route of liquidating its assets is due to insolvency. Insolvency is a state wherein a business reaches a point where it’s not able to make necessary payments when they are due. The liquidation of a company turns the business assets into cash, which is then used to make the payment towards any debts.

Insolvency

If your business is no longer profitable, you may be compelled to contemplate liquidation. If the company is solvent, the directors can continue to govern it; but, if it is insolvent, you can appoint a liquidator to oversee the liquidation and winding up of the firm.

Any remaining assets will be sold to pay off any remaining creditors if the company is declared insolvent. After all necessary payments have been paid, any residual funds are dispersed to any shareholders.

The three kinds of liquidation |

While you may think liquidation to be a straightforward process, there are three different circumstances under which a company can be sent into liquidation. There are two voluntary liquidation procedures and one compulsory liquidation procedure. All the processes require the assistance of a liquidator.

The voluntary liquidation procedures, Creditors Voluntary Liquidation (CVL) and Members’ Voluntary Liquidation (MVL) are initiated by the shareholders and directors.

The compulsory procedure is usually initiated by creditors like HMRC via a court order. Read more on all three types below.

Members’ voluntary liquidation |

The appropriate way to liquidate a solvent UK company is through a Member’s Voluntary Liquidation (MVL), which can be utilised as a part of an exit strategy.

If you have a firm that you wish to close as part of your business strategy and save money on taxes, solvent liquidation can be a good option. You can save money on capital gains tax by using MVLs (at 10 per cent on all qualifying assets)

Your business may have outlived its usefulness and be approaching a natural end of operations, or you may seek to extract the value of the company’s cash and assets in a tax-efficient manner.

The directors must sign a declaration confirming that there are no remaining creditors in order to qualify for an MVL. Tax arrears with HMRC for VAT or PAYE are an example of a creditor, and this must be examined before going into liquidation. The IP’s will realise business assets at fair value, before dissolving them.

Members Voluntary Liquidation requires 75% of shareholders who have been given notice of the meeting of members to pass the winding-up resolution.

Creditors’ Voluntary Liquidation |

Insolvent companies use a Creditors’ Voluntary Liquidation (CVL), which is started by a shareholder resolution. This requires the insolvent company’s dissolution and the allocation of any assets to creditors. This technique allows directors to write off unsecured, non-personally guaranteed firm obligations.

Directors may view insolvent liquidation as a way out of financial difficulties while still properly addressing all creditors. CVL is the most common form of liquidation in the UK, with about 10,000 of these liquidations each year.

The company’s directors then request that a liquidator, who must be a licenced insolvency practitioner (IP), call a meeting of the company’s creditors within 14 days. The IP will provide a statement of affairs of the company to summarise the current situation and explain the procedure at the meeting, which is now commonly held online. The creditors then vote on appointing a liquidator to “liquidate” the assets in order to try to recoup their losses (hence it is called a “creditors” liquidation).

The directors no longer have control or responsibility for the firm once the liquidator is appointed, but they are required to cooperate with the registered insolvency practitioner and give timely information.

The IP will next investigate the directors’ actions, and if they have engaged in particularly egregious behaviour, misfeasance, or fraud, they may be disqualified.

The liquidator’s principal task is to realise the assets and distribute them to creditors, i.e. to write off any obligations.

Compulsory liquidation

A compulsory liquidation occurs when the company’s creditors have run out of options for collecting the debt. The debt must be worth more than £750, be undisputed, and the creditor must have notified the debtor of its intention to collect. This frequently necessitates first issuing a formal demand. The creditor may file a winding-up petition if the debtor does not pay the statutory demand within 21 days and does not contest the debt.

If the judge issues the winding-up order, the official receiver will interview the director and liquidate the company’s assets to compensate creditors. This procedure takes far longer than a voluntary liquidation and causes the directors more worry and inconvenience. Furthermore, the official receiver is required to investigate the directors’ actions. They’ll also have additional resources to pursue any money owed to the company by the directors, which could lead to personal bankruptcy.

In the UK, the Limitation Act 1980 allows up to six years for a creditor to commence legal action to recover a business debt in England and Wales.

The compulsory process is usually instigated with a winding-up petition (the Insolvency Act 1986 and the Insolvency (England and Wales) Rules 2016 (SI 2016/1024). Once it is heard at court, it can become a winding-up order.

What’s the Liquidation Process?

The Liquidation process is as follows:

An Insolvency Practitioner is appointed as Liquidator.
Directors’ powers cease and the IP takes over managing the company’s affairs.
The company’s assets are then assessed and realised (liquidated).
If there are any creditors, they are then paid in order of priority.
Surplus cash is distributed to the shareholders.
The company is finally dissolved and struck-off the registrar of companies (Companies House).

The Role of the Liquidator

To oversee the liquidation process, a liquidator is hired. They have several authorities that allow them to liquidate or sell the company’s assets and utilise the earnings to pay off debts. The liquidator will take charge of the firm, organise the paperwork, notify the various authorities of the proceedings, settle any claims against it, manage communication with the directors, and report on the reasons for the liquidation.

Specific duties of the liquidator will include:

Assessing the company’s debts and deciding which should be repaired in full or in part
Ending any outstanding contracts or legal disputes
Ensuring the company is correctly valued to ensure the maximum return for creditors
Informing creditors of proceedings and involving them in decisions when appropriate
Ensuring funds are fairly distributed to creditors
Compiling a report on the reasons for the liquidation
Dissolving the company

How much time does it take?

This varies depending on the situation and, of course, the type of liquidation. However, it usually takes between 2 and 3 weeks for the firm to be placed into liquidation after the insolvency practitioner is appointed.

If you receive a statutory demand from a creditor, you only have 21 days to pay it, and if you don’t, the creditor will file a winding-up petition (since they have the right), which can take up to two weeks. Conducting and participating in a winding-up hearing within 14 days following the winding-up petition is a legal requirement. Until the process is fully complete, the liquidator remains responsible for overseeing the process in its entirety.

Can I liquidate my own company?

No!

The process must be overseen by a licenced insolvency practitioner.

It’s possible that you, as a director, are concerned about not being able to afford the liquidation charges. However, rest assured that liquidations do not necessitate new cash outlays; instead, you can pay for them using monies raised through the sale of firm assets (which means fewer funds available to pay creditors) or via director redundancy compensation. If the assets do not cover the charges, you will have to pay for it out of your pocket.

Costs & Fees

The average liquidation of a small business in the UK costs around £4000 to £6000 + VAT.

Summing-up

For free confidential advice on liquidating a private company and help with your current situation, please call one of our business solutions advisors and enquire about our services. You can arrange a call back via our contact page at a convenient time, or Live chat with us through our website. At Shergroup we love minding your business and satisfy a client’s problem with our effective and professional business solutions.