Is your limited company insolvent? If your limited company is under pressure from creditors and cannot afford to pay its debts, it may be insolvent and at risk of being issued with a statutory payment demand and winding up petition.
Limited company liquidation involves the closure or your company and the sale of its assets (in this case, the “liquidation” of its assets) to compensate creditors. It’s a common final step for creditors unable to attain payment from your company.
There are several ways for your company to be liquidated, all of which have various advantages and disadvantages. These include compulsory liquidation and voluntary liquidation, which is split into creditors’ and members’ voluntary liquidation.
Liquidating your limited company means that it will no longer trade and will have its remaining assets liquidated by an insolvency practitioner. As such, it’s a drastic step that’s usually only used by companies in dire financial circumstances.
In this guide, we’ll explain the three forms of limited company liquidation and how each one affects your company, your company’s creditors and your personal liability as a director.
There are three different types of company liquidation, each offering advantages and disadvantages for your company, its creditors and its directors. These include:
If your company is under pressure from its creditors, it might receive a statutory payment demand. This is a legal letter demanding payment of any debts owed by your company to its creditors within 21 days or less.
Failure to respond to a statutory payment demand could result in a winding up petition being filed against your company. If your company does not respond, a winding up order will be issued by the court and your company will be liquidated.
This form is liquidation is known as compulsory liquidation, as it’s ordered by the court and administered by a creditor’s liquidator. Although it costs your company little, it leaves you open to allegations of wrongful or fraudulent trading.
If your company has an overdrawn director’s loan account, you could also be held personally liable for its balance. This could mean being forced to sell your vehicle, home or other property in order to repay your company’s creditors.
Compulsory liquidation of a limited company is rarely the outcome you, and other directors, should aim for. Creditors’ voluntary liquidation, an alternative form of liquidation, is usually a far safer and more preferable company liquidation option.
If your limited company is facing pressure from creditors but has not been served with a statutory payment demand, you may still wish to close it and liquidate all of its assets in order to repay creditors.
Creditors’ voluntary liquidation lets you bring your company to an close, ending the pressure being placed on it by creditors and ensuring that its creditors are paid back in some form via the sale of the company’s assets.
Launching the creditors’ voluntary liquidation process at the moment you become aware of your company’s insolvency significantly reduces the risk of you (or other company directors) being accused of wrongful or fraudulent trading.
It also allows you to bring the stress and tension of operating a business while being pressured by creditors to an end, often with an outcome that’s suitable for both your company’s directors and its creditors.
Companies aren’t always liquidated due to insolvency. While compulsory liquidation or a CVL close an insolvent company to liquidate its assets for creditors, a members’ voluntary liquidation closes a solvent company to extract its value.
Directors may wish to liquidate their company for numerous reasons. One of these is to extract the company’s resources – both cash assets and property – at a lower tax rate than the standard taxes that apply when extracting value via dividends.
A members’ voluntary liquidation is only possible for solvent companies. To initiate the MVL process, your company will need to work with an insolvency practitioner to show that it is solvent and capable of repaying its creditors within 12 months.
There are a variety of reasons to liquidate your company, from repaying creditors to extracting value at a reduced tax rate. While liquidation is often carried out because of necessity, in many cases it is a voluntary decision by the company’s directors.
If you would like to learn more about the company liquidation process or you face a limited company insolvency situation, we can offer helpful, actionable advice to help you make the right decision for your company and its creditors.
Liquidation is a serious matter, and acting quickly can produce the best outcome for all parties involved in your company. Contact us today to learn more about limited company liquidation and the other options available for your business.