Liquidating a company is the process of ending the life of the business formally and having it removed or ‘struck off’ from the Companies House register.
This may seem like a drastic option but in some cases it can simply be the result of a change of environment or trading of a business.
There are really three ways that a company liquidation can occur; a voluntary liquidation (known as a Members Voluntary Liquidation), a Creditors Voluntary Liquidation (CVL) or a Compulsory Liquidation or winding up.
The simplest form of liquidation is where the business is solvent but is unwanted. The company may have sold off its trading assets for example and as an entity is not needed any more. In this instance the MVL may be the way forward.
In this case it is a fairly easy process for the directors to sell off any remaining assets, declare a dividend for the shareholders to distribute the remaining capital and then apply to have the company formally dissolved at Companies House. There are some formal steps to take but it is fairly painless.
The benefit of this is largely the reduction in administration needed to keep even a dormant company in existence and of course any resultant fees for things like company secretarial services.
The directors can then be sure that the business is ended and there is no need to be concerned about missing deadlines etc.
The more commonplace liquidation occurs when a business is insolvent, that is when it does not have sufficient cash to pay its creditors when due or has an excess of creditors over assets on its balance sheet.
Directors who are working for a company that finds itself in difficulties should always take professional advice from an insolvency practitioner about whether they need to take action.
The insolvency expert may suggest that the company should look for creditor’s voluntary liquidation.
In this case the business is in danger of wrongful trading – this is where the business continues when there is no reasonable prospect of creditors being paid and can result in action being taken against the directors concerned.
In contrast to the voluntary liquidation previously discussed, a creditor’s voluntary liquidation is carried out under the control of an appointed insolvency practitioner. This means that control, but also responsibility is taken away from the former directors of the business.
Liquidating in this way means that the initial benefit is felt almost immediately in that the credit control calls stop or are routed to the liquidator in charge. It may be that the company has been struggling for some time so this will come as a great relief to the now former directors.
If they have acted honestly and with good faith it is unlikely that they will face any action so the directors may well feel a lot better about a future that doesn’t include the problem company.
It is possible that the business may have some valuable assets or a profitable section. In this case the directors could choose to form a new company and purchase these out of the liquidation. Whilst the liquidator is charged with doing the best for the creditors this can often be simply getting a quick sale. This means that a well formed new company or ‘phoenix’ could set up trading using the brands and assets of the old company but without the debts.
Care must be taken here though that everything is conducted above board so experienced and qualified advice is a must.
If the directors do not go for a voluntary liquidation then the patience of the businesses creditors may become exhausted and they could file for compulsory liquidation.
This is the very last option for people that are owed money as they rarely receive all of what is owed. It is also the least favourable outcome for the directors of the business concerned as the entire process is taken out of their hands.
Again for people managing a company in difficulties, the appointment of a liquidator then removes the responsibility of firefighting and dealing with creditors on a daily basis.
It also means that they can move on and make a break with the past. It is important o remember that a report will be made about the conduct of the directors and if they have acted badly then action may result, so a compulsory winding up is to be avoided wherever possible.
Professionally it may seem that a failed company can only be a bad thing but many entrepreneurs report that they learn far more from failure than success. It’s a difficult thing to see at the time but the experience of a liquidated company is one that informs later decision making and helps owners avoid the same mistakes.
It is vital that directors take professional and qualified advice throughout the insolvency process and it is important to make an early call to ensure that you have the right advice at the right time. Liquidation can have some benefits for the directors of businesses in distress and getting accurate and timely information can be both effective and reassuring