Although it sounds drastic, Liquidation isn’t always the bad thing you may think.
In fact there’s a vital procedure that is used when a company has come to the end of its life without owning money to creditors.
Whatever the reason for wanting rid of a company, as long as it is solvent then it makes sense to choose a Members Voluntary Liquidation (MVL) as the way forward.
A Voluntary Liquidation, as the name suggest is one where there is an agreed course of action rather than a Compulsory Liquidation where winding up is forced upon the company by creditors.
The reason for disposal of the company isn’t necessarily important. Perhaps the market it was operating in simply doesn’t exist any longer (think typewriters or fax machines), maybe the brand name has become tarnished or maybe it makes more sense to wind up the company than try for a trade sale at retirement.
The first question to answer is whether the company is solvent or not. This means that it has an excess of assets over liabilities and that it can pay its creditors when due. It is important to be sure that the firm will have enough cash to pay its creditors, especially if the directors are planning to sell assets to raise cash. Assets may often be held at a book value that is over market rate and so simply having a company that is solvent on paper is not enough.
As long as the company has no legal disputes and it can settle its bills then the process of liquidation is very simple. The directors will also need to be sure that the company has no contingent liabilities here.
The process starts off with the directors making a sworn statement as to the solvency of the firm. This ‘Declaration of solvency’ (form 4.70) is a very simple form but will need to be witnessed by a commissioner for oaths and signed by a majority of the company directors. Directors should also bear in mind that it is a serious matter to make a false declaration of solvency and could result in those concerned being disqualified as company directors in the future.
At least 5 weeks after this point a general meeting of all of the shareholders needs to be called and a resolution to wind up the company duly passed. This resolution must then be advertised in the relevant Gazette within 14 days.
The shareholders will then agree to appoint a licenced insolvency practitioner to manage the remainder of the liquidation process and wind up the company.
The Declaration of solvency should also be sent to Companies House within 15 days of the passing of the resolution.
The big difference between a Creditors Voluntary Liquidation (CVL) and an MVL is what happens to the remainder of the value of the company. In the case of a CVL the value realised is returned to creditors as part, but final payment against their claims. In the case of MVL this value is returned to the shareholders of the company who are after all the ultimate owners.
For directors, assuming that they have acted properly and that the company is not insolvent, there should be no legal repercussions and certainly no damage to their business reputation. In the same vein, voluntarily winding up a company is not the same as being involved with an insolvency. A winding up is simply a natural end to the life of a company that is no longer required.
A Members Voluntary Liquidation may seem like a bit of form filling but there are good legal reasons why this needs to be done. A company is a legal entity, almost like a person and if it’s not to be used any more then it needs to be closed down in an orderly fashion.
Closing a business in this way also protects the directors as once the business is no longer in existence then there are no further duties for them to perform.
Although the process is relatively simple there are some points where qualified and experienced advice is needed. Understanding the solvency status of the company, assessing any contingent liabilities and guiding the directors and shareholders through the process is exactly where a qualified insolvency professional can add significant value and directors should look to obtain help early on.