Liquidating your company is one of the biggest decisions you will make in your life, so it’s important you feel as comfortable as you can be under the circumstances with the decision even though it’s probably very alien to you. We have written this blog to give you the information we think you might need to be comfortable make that decision.
Two important decisions…
Here are two important questions for you that will determine the choice of process and how it is conducted…
- Do you want to simply walk away from the company AND the business, to go and do something else?
- Do you want to continue to trade the same business? – only really appropriate if you believe the business has a future once its debts are written off.
If you want to simply walk away…
If you want to simply walk away from the company and the business, you have a choice of options as to how you do it.
If you run a complicated or large business with a reasonable level of assets you might want to consider the process of ‘administration’. However, for most UK companies, especially those with realisable assets of between £5,000 and £100,000, a creditors’ voluntary liquidation (‘CVL’) is likely to be the best route. In England, approximately 12,000 companies a year – 50 each working day – go into creditors voluntary liquidation. By way of comparison 3,000 go into compulsory liquidation (typically a process for companies with under £5,000 of assets), 2,000 into administration and 400 into CVA, hence CVLs are by far and away the most commonly used process for bringing an insolvent company to an end.
In a CVL, the company’s assets are sold, converted into cash, the monies generated used to pay the costs of the process / distributed, the business closes and the company is dissolved, with the unpaid debts written off. Other than possibly providing a little help to the liquidator with his task of realising the assets, you can simply get on with your life – the liquidator takes the strain.
Do you want to continue in the same business?
If your company is suffering under the weight of unsecured debt that it cannot pay, but if it were to ‘lose’ that debt could be turned around, you have three main options. Firstly, you could consider a Company Voluntary Arrangement, an agreement with your creditors that see them shortsettled – ask us about this process or see our separate blog. Secondly, you could buy the business and assets from the administrator or liquidator either through a ‘pre-pack’ or not. Thirdly, if there is no ‘business’ in the company, say where the business is effectively you, you can simply close the company, then resume trading later, either in a new limited company or other legal form. Please note that there are rules you must follow if you use the same or a similar name and resume trading through a limited company.
Our role prior to any formal insolvency process is to advise you of the pros and cons of each of your options. We will give you an honest and complete appraisal, whether that means we have a continuing involvement or not. It’s then up to you to make a final decision. Once a formal insolvency process starts off, our focus shifts to maximising the monies generated / return to creditors.
Tell me more about the process of a CVL…
The process is a ‘Creditors’ Voluntary Liquidation’ … Firstly, ‘Voluntary’ because it’s a process started off by the directors and shareholders and is not forced involuntarily on the company by the court: Secondly, ‘Creditors’ because the creditors get to decide on who acts as liquidator because the law deems theirs interests to come before those of the shareholders.
Once a company is in CVL – the start of the liquidation is the date of the shareholders meeting – creditor debts are held back, with just a few exceptions.
What is your role as a director?
You as a director decide the specific route the company takes. You, the board, meet together to instruct us to help with the production of the necessary paperwork – the most important step early in the process is a meeting of the members. Ordinarily, the company will immediately cease trading, its bank account frozen, no further credit incurred, the employees made redundant. You consider then sign off the paperwork that we have produced for you – this includes a ‘Statement of Affairs’, essentially a balance sheet at estimated to realise values, and a history of the company. After the members’ meeting, most of the duties you previously owed to the company disappear, your role effectively taken over by the liquidator, who is now fully responsible for the company. Once the liquidation starts you will have a few forms from the liquidator to complete, but to all intents and purposes, you can simply get on with your life, leave this all behind.
I still have to earn a living, how can I do that?
In the UK, our government encourage responsible entrepreneurship, recognising that sometimes things do not work out and that people need a system that helps then get up off the floor again once they’re knocked down. This means you can immediately go and do what you have to, to earn a living. You can immediately set up another limited company and trade through it – but if you do so you need to be very careful indeed about the choice of name – there are some very punitive rules that prevent you using the same or similar name in a phoenix company as that used by the company being liquidated – this is a very complex area of the law, we will give you some guidance on this, but you will have to deal with the process yourself. Alternatively you can trade on your own account, or in partnership.
When companies go into insolvent liquidation (CVL or CL) or administration, the insolvency practitioner has to assess the earlier actions of the directors and submit a confidential report to the government. In those rare instances where the directors’ conduct has not been up to standard, this could lead to the directors being disqualified. Directors who are disqualified cannot be involved in a limited company for the period of their disqualification – this is the exception to the general rule that directors can simply try again through a limited liability company.
You might be able to buy the business and/or assets from the liquidator, through a ‘pre-pack’ or not. Recent case law has shown that the directors should not abuse their ‘inside knowledge’ of a company and its assets to buy back the assets at an undervalue – a sale in a prepack must be at market value.
Do you get redundancy pay, pay in lieu etc?
Employees of a company, provided they have the appropriate service, can claim redundancy pay, pay in lieu of notice, arrears of wages and holiday pay from the Redundancy Payments Service (‘RPS’), part of the government, subject to certain limits. You may be a director and shareholder, but occupying such a position does not entitle you to make a claim on the RPS. If the RPS consider you to have proved yourself to also be an employee, then the RPS will meet your claims as an employee. You will have more forms to fill out than the company’s ordinary employees, and there will be greater evidential requirements. Typically directors’ claims fall down in one in three cases because they did not have a contract of employment with the company or weren’t paid a weekly/monthly wage that passed through the companies’ PAYE/NIC system – these happen a lot in small companies. The RPS will be looking for reasons not to pay you, getting paid is not as easy as some practitioners suggest. Directors of larger companies whose remuneration passes through the PAYE/NIC system, especially where they have no, or only a minority, shareholding, tend to see their claims waived on through.
TOP TIP – Do not give a guarantee to the IP for his fees when he’s effectively relying on you to be paid redundancy etc by the RPS as that money may never come.
What about my employees?
There is no sugar coating this. All the employees are made redundant unless you or another party come along and buy the business and / or assets early in such a way that the Transfer of Undertaking Regulations apply.
What are the advantages of a CVL compared to other procedures or doing nothing?
- Through a CVL you can get your life, or get the business, back on track quicker than the alternatives.
- Creditors are held back, the closure of the business is carried out in an organised way through a seasoned professional and in accordance with the law.
- Employees’ claims are paid by the RPS.
- Early cessation of trade once the directors realise the company is insolvent provides a better protection from wrongful trading and other potential actions than an extended process or no action.
What are the disadvantages?
- Cost – the process has to be paid for as it is carried out by a commercial liquidator. It is worthwhile noting that there is nothing in the legislation that requires you as director to pay for a CVL.
Summary
CVL is the most effective route for closing down an insolvent company that has a level of assets adequate to pay the costs of the process.
How we can help
If you would like some advice on your options including that of CVL, give Paul a call on 01902 672323 or 07813 102014.