While the process of administration may yield a more positive result for some troubled businesses, for some, it may still end in the need to liquidate and close the business. But what is Liquidation and the processes behind it?

What does it mean for a company to become insolvent?

Before we discuss liquidation, the reason a company needs to liquidate and wind-up is often because the company has become insolvent. But what does that mean?

A company becomes insolvent when it cannot pay its debts. This typically refers to situations where a company encounters issues with cash flow or other liabilities that cannot be solved by extending existing credit or funding options. Ultimately, a creditor, often HMRC who are typically the biggest creditor companies have due to tax and VAT liabilities, will petition the court to liquidate the company due to insolvency.

Are all seemingly insolvent companies actually insolvent?

If you take a casual stroll on Companies House, through many smaller business you may be familiar with in your business dealings, you’ll no doubt find a fair few that appear to be insolvent – i.e. they have more debts due that apparent assets to cover them. This is quite common for small or start-up businesses, as they may have not yet turned a profit and are essentially being funded by the directors or have funding options in place to allow for this. There’s a term for this – ‘technical insolvency’. This differs from the type of insolvency usually responsible for the demise of a company, that of actual insolvency or ‘cash flow insolvency’, which affects more mature trading businesses. A firm can continue in a state of technical insolvency for as long as the directors reasonably believe the company can pay its debts and as long as any creditors don’t petition for liquidation.

What are the different types of liquidation?

The liquidation of company can take two routes, either through the courts or voluntarily. Reading further will outline the reasons why we suggest you don’t procrastinate and take a proactive role in the closure of your business.

Compulsory liquidation

If you have been receiving threats from creditors in regard to unpaid bills, such as statutory demands, this may ultimately lead to creditors petitioning the Courts to liquidate the company. This means forcing the company to shut down. They do this because they believe that the business is unable to fulfil its debts and want action to recover as much of the debt as possible. The process aims to distribute any remaining assets in the company (through the sale of equipment, unsold product, raw materials, etc., even intellectual property), to the creditors. The first step in this process is that the business owner receives a Winding Up Petition (WUP) from the courts.

Members voluntary liquidation

This process is one chosen by directors of a company who which to close down a ‘solvent’ company. There may be many reasons for this, chief among them a desire by the directors to exit the business, perhaps to move on and do nothing different as this business has come to the end of it’s useful life, or perhaps because directors are looking to retire and now want to benefit from any equity in the company.

As this is a voluntary process, not court proceedings are involve. This is also a tax efficient way to bring about the control close of a business.

Creditors voluntary liquidation

For those directors who realise ‘the writing is on the wall’ and that they will not be able to satisfy their debts, choosing to voluntarily wind up an insolvent company is a sensible proactive option to take. This is because it essentially affords the directors some control of the winding up process, such as appointing the insolvency practitioner, rather than the creditors, as in the case of compulsory liquidation.

Trading while insolvent

If your business continues to trade while insolvent, as a director, you risk becoming personally liable for any trading activity during the insolvency period, such as incurring further debt. It’s essential, therefore, that you talk to a licensed insolvency practitioner as quickly as possible so they can run through your options with you.

How Berley Insolvency can help with liquidation

The insolvency practitioners at Berley Insolvency have extensive experience in assisting troubled companies through the process to determine the best route to wind up a company, and, to come to terms with that. This is why it’s important to talk to an insolvency practitioner at the earliest opportunity, while options are still available. We’ll also provide guidance on the trading status of the company and make sure that you remain fully compliant in regard to your duties as a director.

Contact the insolvency team at Berley Insolvency to discuss your situation.