When we hear about companies getting into difficulties it can be confusing, especially when terms such as ‘administration’ and ‘liquidation’ seem to be used almost interchangeably. Poorly researched articles in the press certainly don’t help so in this post we’ll try to demystify the liquidation methods and let you know a little about each.
Members Voluntary Liquidation
A Members Voluntary Liquidation or MVL is probably the most controlled and least contentious of all the liquidation types.
In this instance, the shareholders (often the directors) of the business decide that they no longer want the company and decide to close it down and realise the assets.
The main feature of this type of liquidation is that the company must be solvent and have the resources to pay off its creditors.
In an MVL the assets of the business are realised, either through public auction or private sale, the remaining creditors are paid off and what remains is distributed to the shareholders in accordance with the Articles of Association and Memorandum.
Once this has all been done then the company can be formally wound up and removed from the Companies House register.
This is a fairly straightforward process and it may seem simple enough for a company director t do alone however it is best to take advice along the way as there are points in the process which, if not done correctly could cause issues later on.
Creditors Voluntary Liquidation
Creditors Voluntary Liquidations (CVL) are almost the counterpart to the MVL in that they are entered into voluntarily by the directors of the business, however, this type of liquidation is suitable for companies that are insolvent.
It may seem counterintuitive that a director would voluntarily choose to put their own company into liquidation but continuing to trade whilst the business is insolvent could open up the directors to charges of wrongful trading. In turn, this could lead to surcharges, fines and even disqualification from running companies in the future so it is important to ensure that proactive action is taken in good time.
In a CVL the directors choose to take control of the situation when it becomes clear that the company is insolvent, that it’s not a temporary state of affairs and that there are no more resources to call upon.
Once the course of action becomes clear they will pass a resolution to wind up the company and contact an insolvency practitioner who will set the wheels in motion.
This is not a nice thing to do and it may be tempting to put off making the decision or taking action but, like going to the dentist it is, unfortunately, a necessary evil and the adult thing to do.
When the creditors of a business lose patience and see no realistic chance of getting what they are owed they may choose to launch a winding-up action through the courts.
This won’t be a surprise to the company as they will have been through normal debt collection procedures and should have received a letter before action prior to the winding up petition being presented but nonetheless, it is a distressing time for all concerned.
The creditors will present a petition to the court for debts over £750 (or where a CCj has been issued) and the court will, in turn, appoint an administrator to look after the affairs of the business.
The administrators’ chief aim is to realise as much money as quickly as possible for the creditors.
This may simply be by selling off the business to a trade buyer (or indeed some or all of the former directors), or by going down the liquidation route which often ends in a public auction of goods at the company site.
It goes without saying that this is a course of action best to be avoided by directors as essentially they lose all control and the assets are often sold at less than their full price simply to realise cash quickly.
Thinking about company liquidation?
If you and your fellow directors are thinking about liquidating your company then there are some simple steps you can take that make things easier.
The first step is to stop procrastinating. You may choose either to liquidate or not but you need to make a decision rapidly, especially in the case of an insolvent business as waiting may mean that you are trading wrongfully.
The second step is to informally call in an insolvency professional. They will be able to take a look at the situation in a dispassionate way and will be able to give you clear advice as the way forward.
It has to be said at this point that the quicker you call in a practitioner then the more options are likely to be open to you so even if you eventually decide not to go down the liquidation route it will be money well spent.
You also need to make sure that you have an up to date set of accounts. At a minimum, you’ll need a balance sheet but a profit and loss and cash flow are good too. If you can do it then get together a realistic cash flow forecast for the next 6-12 months to give a clear picture of the outlook. Doing this now gives you more information to work on and your insolvency practitioner will need to do this anyway.
Liquidation doesn’t have to be the end of the world and may or may not be the best option for you and your business. The best piece of advice is to get qualified and experienced help in as soon as you can to give you the most options for a successful future.