When people hear of liquidation they usually think of businesses in trouble, and indeed the majority of firms that wind up do so because they are unable to pay their debts. Sometimes however businesses may have just reached the end of their natural cycle and the owners may feel that it’s not worth the effort to change their model to save the company.
It’s also true to say that often a group might change focus and look to divest itself of what may become ancillary activities and they will want to do that in a managed way. Alternatively the owners could be retiring with no-one willing to take on the business in the future.
The initial step is to make a decision at a board meeting. Directors should discuss the options and decide on the best way forward. The key question they need to answer is whether they are doing the best for their owners. It is also vital to discuss with the individual shareholders what the plan is. It may well be that the directors are in fact the only shareholders but it is important to avoid any legal challenge at a later date by keeping everyone fully informed.
The fact is that there will be costs involved in liquidating a company and executives need to ensure that they have looked at other options such as an asset sale or selling as a going concern before going for liquidation.
That having been said it is distinctly possible that the firm may have an old, outdated or damaged brand and may not be worth saving. In which case the best way forward will be to liquidate the assets, pay off creditors and distribute what remains to shareholders.
There are three types of liquidation; Members Voluntary Liquidation (MVL) where the company can pay its debts but chooses to close down, liquidate assets and pay creditors and shareholders what remains; Creditors Voluntary Liquidation where the directors choose to close an insolvent company because there is no prospect of it paying off its debts; Compulsory Liquidation, where the company cannot pay its debts and is forced into liquidation by the creditors.
In this case we’ll examine where the company will have sufficient resources to pay back any creditors in full and carry out an MVL.
Once a resolution has been passed at a board meeting to liquidate the company the business will have to go about the process of stopping trading and ending any transactions. As part of the procedure there will have to be a three month gap between the last transaction and applying for striking off.
Executives will need to stop any sales and make remaining staff redundant or transfer them to other parts of the group. It’s also worth thinking about any guarantees that may have been signed in the past and ensure that these are released.
Next creditors will need to be paid. It’s important to think about any contracts and whether there are lock in periods, minimum notice periods or prepaid amounts. Have any security deposits been paid? The aim is to settle all debts and collect any outstanding monies from debtors as soon as possible.
It is also necessary to settle any HMRC debt for PAYE or VAT as they will automatically object to a striking off if they are owed money. Making sure that the firms’ account with the taxman is clear will save time later on.
The object of this part of the process is to get to a clear balance sheet. There should be no creditors left as they will all have been paid. Debtors will have been collected from or their accounts written off. All direct debits and standing orders will be stopped and there will be no further commitments in the future. Any remaining cash can then be distributed to shareholders as a dividend, allowing the bank account to be cleared and closed.
By the end of this the balance sheet should only have reserves and shareholders’ equity left.
Directors will need to complete a form 4-70, Declaration of Solvency to attest that the firm is solvent and suitable to go through a Members Voluntary Liquidation. A resolution will also need to be passed to reduce reserves and equity to £1.
A shareholders general meeting will have to be called at least 5 weeks after signing the form where a resolution will need to be passed to wind up the company and within 14 days an advertisement must be placed in the Gazette informing the public of the winding up.
The business will have to prepare final accounts and send them to HMRC to show that no Corporation Tax is due and inform the tax man that the company is destined to be wound up, although it is not necessary to lodge the accounts with Companies House.
After 3 months with no transactions the company can complete form DS01 “striking off application by a company” and send this in to Companies House together with a fee of £10. Directors are often tempted to change the name of a company before liquidation and this can be done but it must be completed at least 3 months before completing DS01.
Companies House will publish a notice in the Gazette (there are actually three different versions depending whether you are in England and Wales, Scotland or Northern Ireland) giving potential objectors three months to raise any issues.
If no objections are received then a further notice will be published in The Gazette stating that the company is struck off and it will cease to exist. Of course there is a requirement for the records of the company to be held for a further seven years (or 40 in the case of some employment records) but to all intents and purposes by this point the firm is no more.
The process of winding up a company is not difficult, as long as the procedure is followed correctly. Directors also need to make themselves aware of the best way from an operation and a taxation point of view. Getting experienced qualified advice is vital before the decision is made to ensure the best outcome.