FAQ – Liquidation

If the company has insufficient cash flow to meets its debts as they fall due, it may well be insolvent. It is important that directors take this seriously as they are at personal risk if it is proved they traded the company ‘wrongfully’. Most of the time is it obvious that a company is insolvent, but if you want a simple test email us for our solvency calculator or give us a call. Sometimes it’s simply a case of knowing when to accept defeat. For example, it may be not possible to restructure the business and produce a viable enterprise, or the directors and shareholders may have just run out of steam. There’s no point continuing with the worry and stress of a failing business if there is little chance of turning things around. A CVL allows you to close the business down and move on with your life. However, we would always recommend a formal review to consider if a business turnaround solution like a Company Voluntary Arrangement or even an informal time to pay arrangement it a better option than liquidation.Remember a CVL is not the end of the business. Following an independent valuation of the assets of the business, the original owners, shareholders and directors are entitled to buy them. In fact, this often provides the best value and allows the enterprise to continue as a new limited company. This is not only legal but is often in the best interests of creditors and the wider economy. It protects jobs and gives the owners a second chance.

There are significant legal requirements in ensuring a CVL and business phoenix is successful and fully compliant with the insolvency law so again it is important to take advice.

Directors need to be aware that personal guarantees given to a bank, or a landlord, and overdrawn loan accounts will be a potential problem, again we believe in making the right business decision first and then managing by negotiation [which we do as part of our service] the fallout or problems. If you have personal guarantees or a directors overdrawn loan account or are not sure call us or further.

On the other hand, we know a failing company is a burden and that many people seek liquidation simply because they’ve had enough. We help take the pressure off so you can investigate all your options.

The limited company exists in the eyes of the law independently to that of its company directors or shareholders. A limited company is considered in law to having a separate legal identity.

Although liquidation should be treated as a last resort, CVL does offer significant benefits.

The rules governing the management of a company change when it becomes insolvent. In general, the director of a solvent company has to be seen to act in the interests of the company and its shareholders. However, if a company becomes insolvent the duty of care changes to that of principally protecting the creditors of the company.

If a company director continues to trade with full knowledge that the business had no ‘reasonable prospect’ the director may be liable for the company’s debts. By trading an insolvent business the directors risk being held liable for both wrongful trading under section 171 to 175 of the Companies Act of 2006 and section 212 and section 239 on The Insolvency Act of 1986. If you have taken drawings in addition to salary, paid trade creditors at the expense of HMRC then you should take urgent advice now.

If the directors keep an insolvent business trading when it had no real prospect of ‘trading out’ of its insolvency ‘The Official Receiver’ or ‘Liquidator’ eventually may accuse directors of wrongful trading or more likely creating a preference and seek financial compensation directly from the directors. Notwithstanding the financial risks, the directors could confront a Directors Disqualification Order regarding their conduct.

Therefore it is important to seek advice and take action. By taking control of the situation and committing to the closure of the business, you reduce the risk of accusations of ‘wrongful trading’, and creating preference and creditor investigation and personal liability.

Deciding on when you should struggle on and try and trade the business out of insolvency or call it a day it not always that straight forward, but it helps to take advice about your strategy from a professional turnaround consultant or insolvency practitioner to both help you clarify your thoughts and strategy and protect you at a later stage.

What’s more, a Creditors Voluntary Liquidation doesn’t have to be the end of your business. Your limited company may well be insolvent and once other options such as a ‘Company Voluntary Arrangement’ have been considered a CVL can offer a second chance. By closing the business down legally the business assets and goodwill can be sold back to the original shareholders and directors. This often represents the best outcome for the insolvent company and its creditors, and gives the owners and managers a second chance. Again it is important to ensure this sale of assets is properly managed under the supervision of the insolvency practitioner with independent valuations undertaken to avoid legal challenges.

Get in touch for advice on how to use this technique to create a new, solvent company or Pheonix Company that could see you gaining that success you always wanted. Call today on 0800 0385 140 to find out more.

So the key advantages of a Creditors Voluntary Liquidation or CVL can be summarised as:

1. Legally closes down the insolvent legal entity or old company
2. All debts die when the company is closed
3. Allows a second chance to shareholders and directors who can purchase back assets and goodwill and start into a new phonic company
4. By taking decisive action to seek a CVL the directors demonstrate good compliance and are at less at risk
5. Creditors’ Voluntary Liquidation is also useful if you are faced with compulsory liquidation and want to take matters into your own hands