What is Liquidation?December 20, 2019
To many, liquidation is a scary word.
It brings back memories of forgotten, much-loved companies who met their untimely demise.
That being said, it's important to remember that liquidation is often a natural part of the life of a business.
It can happen for various reasons - from mediocre sales to shareholders merely wanting to move on to another venture.
We're going to explain exactly what liquidation is, why a company might choose this option and answer a few questions about the aftermath.
If your company is facing liquidation, due to insolvency or otherwise, don't panic. Get in touch with our insolvency practitioners who'll guide you through the process.
What is liquidation?
Liquidation is when a company's assets are sold off in order to pay any debts. Any funds left are divided by the liquidator to the shareholders. The company is typically removed from Companies House.
Liquidation can take place for a couple of reasons:
Insolvency: Liquidation usually takes place when a company is insolvent (unable to pay debts owed). An "insolvent business" is one which can't pay their debts, or when the debt exceeds the value of the company's assets.
The cause of this could be anything, from revenue loss and increased overheads to irresponsible purchases. Insolvent liquidation doesn’t usually come as a surprise, and the signs can be visible - if you think your business is heading this way, seek advice now!
Business Exit: Liquidation proceedings can be a good option for business owners who want to exit a healthy company due to retirement or change in the business area. A solvent closure ends the business and takes any remaining value in the most tax-efficient way.
What types of liquidation are there?
While all cases of liquidation follow more or less the same trends, there are a few different types:
Members’ Voluntary Liquidation:
A members’ voluntary liquidation (MVL) is only available to solvent companies. In an MVL, the company's shareholders appoint a liquidator (an insolvency practitioner) to manage the liquidation process.
This practitioner follows liquidation procedures to:
- Liquidate all company assets.
- Pay off any remaining creditors.
- Prepare and submit a final tax return.
- Obtain clearance from HMRC.
- Distribute any funds left to shareholders/owners.
- Dissolve the company.
It’s important to remember that an MVL doesn’t take place due to insolvency. An MVL is done when the owners of a business are looking to retire, or when the company's particular line of work has come to an end.
The main goal of an MVL is to distribute funds to shareholders in the most tax-efficient way. As liquidation allows funds to be distributed to the shareholders as capita, as opposed to income.
This means that the funds are only subject to a 10% tax rate (Capital Gains Tax with Entrepreneur’s Relief). This is a stark contrast to the potential 38.1% (or even 45%) tax rate that would apply if the funds were to be considered dividend or earned income.
Creditors' Voluntary Liquidation:
A creditors' voluntary liquidation (CVL) occurs when a company's creditors decide to wind up the company because it’s insolvent.
A CVL is more or less identical to the MVL. The only difference is the route into liquidation.
With a CVL, the members meet and decide to put the company into liquidation. The creditor then votes to appoint the particular liquidator (usually on the same day).
During a CVL, the liquidator realises all the company's assets and distributes them to creditors.
A court liquidation, also known as compulsory liquidation, is when a company receives a winding-up order from the court following a petition requesting liquidation. Usually, it's the company's creditors or the company itself that make the petition.
The court will appoint a particular insolvency practitioner to be the interim liquidator. In most cases, the court will end up appointing that person.
After the liquidator has been appointed, court liquidation becomes identical to CVL.
What happens to debts?
After liquidation, an insolvent company is pretty much guaranteed not to have enough assets to cover outstanding debts.
The liquidator decides which debts the business assets will repay. Anything that can't be repaid (decided by the liquidator), is written off.
However, it's essential not to take things into your own hands. Don't pay a long-term supplier that you have a good relationship with and ignore those HMRC tax bills. In this scenario, the liquidator could take legal action against this supplier to get the money back.
If your company is insolvent or facing insolvency, do not try and settle some debts rather than others.
What happens to my brand?
The fate of your brand depends on its value. If it's well-known and recognisable, the liquidator can try and sell the brand.
If not, then this brand will be lost after the company is closed.
You can't just re-use the business name or brand with a new company. There are strict rules around using the names of an insolvent business. Re-using an insolvent business name is called "passing off" and is illegal under the "Insolvency Act 1986."
Can I still own businesses?
Yes! There's no reason why you can't own a business in the future. However, this isn't guaranteed.
An insolvency practitioner will investigate the conduct of directors leading up to/during the liquidation process.
If the practitioner determines that you've been dishonest or negligent, you could be disqualified from owning a business for a period of time!
Liquidation doesn't always need to mean disaster - if you're smart about it.
If your company is facing insolvency, seek advice immediately. If you get the help of the right people, a viable business can be turned around.
Don't bury your head in the sand. Get in touch with our highly experienced insolvency practitioners who can save your business.
Contact us here or give us a call on 0141 280 3221.