Liquidation is often seen as a wholly negative thing but many companies are liquidated each year for entirely sound reasons. In this post we look at how you go about dissolving a solvent company when it is simply no longer needed. Please note that this is based on England and Wales as the regulations are slightly different for firms incorporated in Scotland.
The first thing to say is that winding up is not always due to distress. A company may change its operating model or wish to move out of a particular sector and, rather than sell out to a competitor may run down a business in a structured and orderly way, liquidate any remaining assets, pay off the creditors and then go through the dissolution process. This has to be done in a specific order and there are clear steps that need to be taken to move through this method. It is not massively onerous but it really is important to get the bureaucratic steps done correctly to ensure the right outcome.
One of the often misunderstood facts is that dissolution happens to the company and not the individuals. It’s one of the main reasons for incorporating in the first place and so if a series of unfortunate events have happened and there is no way forward then the directors of the firm can continue on in business elsewhere. Dissolution is also company specific. A winding up may happen to one or more members of a group allowing the other companies in the organisation to continue unaffected.
There are two types of liquidation or ‘winding up’. The first- a Creditors Voluntary Liquidation when the company cannot pay its creditors and a Members Voluntary Liquidation is used when the company is solvent (in other words it has enough money or assets to pay its debts). The third option is to simply go through dissolution or ‘striking off’. This is of particular use if the firm is no longer trading.
There are number of steps to be taken when winding up a company and they need to be done in the right order and in the correct manner. The first thing the company needs to do is to simply stop trading. This is probably easy if you have a firm that has changed its business model or a brand that no longer sells but there will be things that need to be considered in terms of TUPE or redundancy regulations if there are staff.
Once the company has ceased trading you’ll need to wait three months before applying for striking off. A company can still be struck off the register if it has settled business debts during this time but not if it has traded. You cannot apply for dissolution if there are any insolvency proceedings going on against the firm.
Form DS01 must then be completed by the directors and sent in to Companies House. This is the application for striking off and you must also inform anyone affected such as shareholders within 7 days by sending them a copy of the form. Another 3 months must pass before the registrar publishes an advertisement in the London Gazette which effectively completes the dissolution of the company. As with a liquidated company, at this point any assets still held by the firm will pass to the crown Bona Vacantia.
In the case of liquidation you’ll need to download form 4.70 from the Companies House website and complete it at the start of the process. This is the Declaration of solvency and has to be signed by a majority of the directors and is your legal undertaking that you don’t owe more than you hold in assets.
The Directors must then call a general meeting a minimum of 5 weeks later. At the Special Meeting a resolution must be proposed and passed that the company be liquidated.
At this point you must appoint a licenced Insolvency Practitioner to handle the process in the case of liquidation. Clearly appointing an IP as a liquidator will cost money and a resolution must be passed at the meeting setting out the proposed fees, but once appointed they will take over the whole process and your duties as directors will cease.
The assets of the company will need to be liquidated. For stock and machinery this will mean selling off, either through simple trade sales or through an auction. The aim is to raise money that will allow the creditors to be paid in full. Remember your company has to be solvent so at the outset you’ll need to be realistic about how much can be raised from these sales.
At this point the liquidator will need to settle any creditor’s bills. It may be that they can take advantage of any discounts available for early settlement or it could be that they have very little to do in the case of a company that has been running down for some time. Either way the aim must be to have a balance sheet at the end of the process that contains only the remainder of any cash and the shareholders’ funds. If any money is owed to HMRC then you can expect them to challenge any striking off procedure.
Remember that as this is a solvent liquidation there are generally no meetings to be held as all the creditors will be paid off to their satisfaction.
It is also worthwhile speaking with the firms’ tax advisors to make sure that there are no implications behind the liquidation or that there is no other more beneficial way to complete the process.
If there are any shareholders funds or cash left in the company then they will be distributed to the shareholders pro rata to their holdings.
Another important fact to remember that after liquidation of the firm any assets held are passed to the crown bona vacantia. It is vital therefore to make sure that any hidden assets are thought about. This doesn’t necessarily mean secret stashes of cash beneath the mattress (of course it might do) but more things like Intellectual Property such as brands and trademarks or intangible assets like potential legal claims.
What will then remain is essentially a shell of the old firm and this is what gets liquidated.
You can get more information about dissolving your company or the liquidation procedure by calling the .gov Insolvency Enquiry Line 0300 678 0015 (8am to 5pm Monday to Friday)