A guide to business liquidation processes
With the recent pandemic causing unprecedented interruption to businesses across the UK and worldwide, our partner and North West Chair for UK’s insolvency trade association R3, Allan Cadman, has explained the different processes of liquidation to help support business directors and shareholders during this difficult time.
What is liquidation?
Liquidation is the process, in simple terms, of disposing of a business‘s assets, turning them into cash for ease of equitable distribution amongst stakeholders.
This usually occurs at the end of the life of a business or when hands are forced by an insolvent position. The processes are part of a complex legislative and regulatory framework, where only a qualified and Licenced Insolvency Practitioner is authorised to act by law.
The entity’s financial position defines the type of liquidation, and a qualified insolvency practitioner (IP) can advise accordingly.
A solvent (or Members Voluntary) liquidation is the legal process of ending (commonly referred to as winding-up) a limited company or partnership. This is when the assets of a business exceed its liabilities and that any liabilities can be discharged within 12 months.
Directors of such businesses are urged to undertake full due diligence to ensure that this is the position, as there are significant penalties for making a false ‘Declaration of Solvency’.
Assets are ‘liquidated’ and distributed in proportion to the shareholding in the Company. The process is commonly used as part of tax or retirement planning for shareholders. When all funds are distributed at the end of the liquidation, the company will be removed from the register at Companies House.
Insolvent liquidation is a far more complex issue. It is when liabilities exceed assets and inevitably draws an emotive response from those who are likely to lose money.
Creditors’ Voluntary Liquidation
A creditors’ voluntary liquidation (CVL) is the most likely route if a board of directors considers that their business is insolvent with no prospects for recovery or rescue through a voluntary arrangement or other rescue procedure. You may also choose this route if there are no prospects for a sale of all or part of the business through an Administration procedure.
The majority of directors favour this route as it means that they remain largely in control of timing. It enables a company’s employees to submit claims for their entitlement almost immediately rather than wait for a creditor to take action.
It also enables the IP to assist in protecting the position immediately as the passage of time erodes asset values.
The process is instigated by the directors who engage the services of a licenced insolvency practitioner who advises the board of their responsibilities and options in the first instance. If this becomes a formal engagement, then the IP maintains advises the board but must also consider the interests of creditors. Once formally appointed as liquidator, the IP has a duty to act in the best interests of creditors.
Liquidation means that a company’s assets are recovered and sold in order to establish the actual property of the distressed company. It is the IP’s duty to distribute this fund amongst creditors in a strictly defined order of priorities set out in statute and subject to priority claims such as charge holders.
Preferential claims are first in line, such as outstanding wages, pension contributions followed by taxes such as PAYE and VAT. All unsecured creditors will then rank in a pari passu manner.
It is the duty of an IP appointed as liquidator to investigate the conduct of a company and its directors in respect of the three years preceding the liquidation. Should he identify any areas where funds or assets have been misappropriated, there will be an obligation to pursue any party who has benefited from such misappropriation.
Common areas for investigation are as follows:
- Gifts or transactions at undervalue;
- Preference which is putting a person in a better position than they would have been compared to like for like creditors;
- Misfeasance or misappropriation of funds
A licenced insolvency practitioner will be able to advise on these whether you are a company director considering the consequences of insolvency or indeed as a creditor in an insolvency procedure.
There are also severe penalties for directors or connected parties operating new businesses with the same or similar names to an insolvent company within a five year period and not satisfying certain qualifying criteria. Again, an insolvency practitioner will be able to advise on the consequences of acting in such a manner.
It is also the liquidator’s responsibility to report their findings to the Insolvency Service, who will then consider whether they take any further action regarding the disqualification of directors.
Whilst a company’s director can instigate a compulsory liquidation process, it is predominantly the procedure to enable creditors to take matters into their own hands if they are significantly aggrieved by a business indebted to them.
Following the tapering of protective measures during the Covid-19 pandemic, a creditor may now petition for the compulsory winding-up of a company if the debt is in excess of £10,000 and the subject company has been given 21 days to formulate any repayment structure.
Once a winding-up order has been made, the Official Receiver, a Civil Service arm of the Insolvency Service, is appointed as liquidator. It should be noted that this may be many weeks or months following the petition.
Whilst the obligations of the Official Receiver are broadly similar to those of an IP in a creditors’ voluntary liquidation; assets are often denuded by the passage of time. There is also an immediate set cost to the estate by the Secretary of State.
The Official Receiver also has arguably greater powers of investigation due to their links within other government departments. Also, the fact that a director has not taken action voluntarily when faced with insolvency is taken into consideration.
Restrictions on acting as a Director
In general terms, there are no restrictions on acting as a director unless you are subject to a Disqualification Order or undertaking. Also, you cannot act as a director if you are an undischarged bankrupt.
Poppleton & Appleby doesn’t view insolvency as the end of business life; for some, it is an unfortunate diversion in the journey, but it doesn’t have to be a dead-end.
If you need help discussing the best options for you and your business, whatever formal insolvency process is required, we work hard to make the experience as positive as possible.