Whether it is a limited company, limited liability company, partnership of sole trader, dealing with mounting debts, pressure from creditors and HMRC, not being able to meet financial commitments is an incredibly stressful, worrying time. Often directors end up going round in circles not knowing what to do. Well, the first port of call is to seek advice from a professional who will be able to help determine the extent of the situation and suggest potential methods to resolve the crisis.
Insolvent companies generally don’t choose to be in dire straits financially. There are myriad reasons that have led to insurmountable debts and insolvency, not least the following:
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- Higher than expected tax bills, replacement of large machinery unexpectedly, or an unforeseen expense that causes a cash flow problem.
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- Active or aggressive competitors resulting in loss of market share and sales.
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- Key customers going elsewhere.
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- Quiet sales periods that are significantly longer than normal.
The earlier an insolvent’s company directors and owners take responsibility for the problem, the greater the number of options available, such as voluntary arrangements, voluntary liquidation and business recovery. Ignoring it until either the bailiffs come knocking on the door or a winding up petition is granted by the court to a creditor, forcing compulsory liquidation, is just going to make matters far worse.
Insolvency and liquidation
Insolvency essentially refers to anyone running a business that has run out of money to meet their financial monthly commitments, and/or whose debts outweigh its assets. Usually, when this stage is reached, every other option has been tried and failed – liquidation has become the last resort. Any insolvency or liquidation proceedings must be handled by a licensed professional insolvency practitioner, administrator, receiver or liquidator.
When a limited company becomes insolvent, they enter into liquidation and a liquidator is appointed, either by the company, the creditors or the court depending on the action taken. They will then take control of the company and progress the liquidation process.
When an individual becomes insolvent, they declare bankruptcy or enter into an Individual Voluntary Arrangement (IVA) with their creditors.
Pre-pack administration
Sometimes insolvency is the only option for a company. A viable choice for directors is to dissolve the company with the potential to purchase the assets of the company back during the administration procedure with the intention of starting a new business. This is allowed as long as it’s not trading with the same or similar name, nor in a similar or same industry, and a period of time has elapsed from the old company being liquidated and the new company being formed.
This is called ‘phoenixing’, i.e. a new company is ‘rising from the ashes’ of the old company. The directors/owners have the option to transfer the assets to a new company. But be warned, this action will result in the closure of the old company and it will be taken off the register at Companies House.
Before this happens, it is important to ensure that all assets have been sold or transferred, and that all bank accounts are closed because when the company comes off the register, any remaining assets or capital will belong to the Crown. However, it is a viable option and directors often prefer to do this rather than lose company’s assets.
Creditors’ Voluntary Liquidation (CVL)
For insolvent limited companies, the board of directors may choose the CVL route to close the business, as long as 75% of the board agrees to this action. Whilst company liquidation is the last resort and usually comes after months of financial stress and alternative ways to rescue the company, once insolvency has been determined, any assets should be protected and trading must stop immediately. It is unlawful to continue trading once insolvent. After the appointment of a liquidator, who takes control of the company, they handle the liquidation process in its entirety.
Following the decision to liquidate the company, a meeting with all the directors and shareholders is scheduled, unless there are fewer than ten creditors. Then the liquidators advise the creditors and shareholders, place an advert in The Gazette and the liquidation process begins.
The liquidator arranges for the company’s assets to be valued and sold at market value – the directors are not personally liable for the debt but do have the right to purchase any assets from the company as long as it is at market value and dealt with via the liquidator.
Whenever deciding to proceed with the liquidation process, the more issues that the directors can sort out at the beginning, the better. If there are any outstanding invoices that haven’t been paid, call them in. Prepare a final draft of the company accounts, any VAT returns and calculate the potential corporation tax so that it’s ready for the liquidator to finalise and submit to HMRC.
Always work closely with the liquidator when it’s a voluntary liquidation process as they are working on the company’s behalf. With compulsory liquidation, the court-appointed liquidator works on behalf of the creditors. Once the CVL has been completed, the company is struck off the register at Companies House and it no longer exists.
Compulsory liquidation (WUC)
Compulsory liquidation is a formal process that has been forced upon the company by a creditor. Before a creditor can go to court to apply for a winding up petition, they must be owed more than £750 and have made sufficient efforts to seek payment from the company.
The liquidator is usually appointed by the court and there is a specific legal process that is followed for compulsory liquidation in accordance with the Insolvency Act 1986. Once the petition has been issued, an ad is placed in The Gazette (London, Edinburgh or Belfast) seven days later advising of the company liquidation. Bank accounts will be frozen and the company is no longer allowed to trade.
After The Gazette notice and when the company is no longer trading, an official receiver (liquidator) is appointed to take control of the company. The directors are relieved of their duties – they are expected to help the liquidator – and the liquidator will arrange for the company’s assets to be valued and sold at the market value price.
Once the assets have been sold, which can take weeks, months or even years, and creditors have been paid, the company is dissolved and struck off the Companies House register; it doesn’t exist anymore.
Although a CVL and compulsory liquidation are legal processes for insolvent companies, the difference between them is that a CVL is a voluntary process and the other is compulsory.
Business insolvency is not something that any business wants to deal with. However, the sooner a financial problem is recognised, the sooner it can be dealt with. For more information on how our professional insolvency practitioners may be able to help your business, contact us today on 0800 246 5895 alternatively visit our website.
