What does it mean to fold a business?
You may ask why would I go to the bother of arranging a formal wind up of my business when I can apply to dissolve my company or simply let a creditor take action to wind up the company. But you should know that formally winding up your company via a voluntary process can be the best option in many cases. So what should you know about the process of folding a business via a liquidation?
What is Liquidation?
The two most common ways to start the process of liquidating a company are:
- The shareholders of a company can resolve to appoint a liquidator, often by signing a resolution for the liquidator’s appointment; or
- A company owing the creditor more than £750 can apply to Court and have them appoint a liquidator.
When a company is placed into liquidation, a liquidator will be appointed. The process of liquidating the company then begins, and the liquidator will:
- Take control of the company’s assets;
- Establish the events and circumstances leading up to the liquidation of the company (where the company is insolvent);
- Establish the company’s financial position in order to determine whether the company traded whilst insolvent (where the company is insolvent);
- Consider whether any wrongdoing by the director, such as insolvent trading or breaches of director’s duties (where the company is insolvent);
- Report the results of the liquidator’s investigations into the director’s(s’) conduct to the Insolvency Service (where the company is insolvent);
- Report the prospect of a dividend being paid to the company’s creditors (where the company is insolvent); and
- Provide distribution of the company’s property (if any) between its creditors (and where applicable, its shareholders), in line with the Insolvency legislation.
Advantages of a voluntary liquidation
There are many advantages to formally winding up a company voluntarily, including the following:
Peace of mind
For some directors, this may be the most important reason for winding up their company. It draws a line in the sand and lets the director move on safe in the knowledge that their company has been formally closed down in an orderly way, and ensures all statutory matters met.
Liquidation costs are generally low
The cost to liquidate a company is generally fairly low. Especially when you compare it to the total debt owed by the company in many cases. Furthermore, where the company has sufficient assets, the asset realisations can cover the liquidation costs and there is, therefore, no cost to the director personally.
Debts are written off
If a company enter a voluntary liquidation, and any dividend paid to creditors has been made, any remaining debts are then written off.
Employees can claim redundancy pay
The company is not required to pay its staff, including directors paid through PAYE, redundancy pay, arrears of holiday pay, wage arrears and lieu of notice, as its staff can claim these outstanding monies (subject to statutory limits) through a government organisation call the Redundancy Payments Service.
You won’t have to speak to your creditors
Another benefit is that the liquidator deals with all debts, and you won’t have to speak to any creditors.
Legal action ceases or can’t be bought
No new actions can be instigated once a company is in liquidation, and all outstanding legal action brought against a company that has been formally liquidated can no longer be progressed
Directors have more control and input in the process
There are a few different types of liquidation. A Creditors’ Voluntary Liquidation (CVL) is the voluntary process where the company’s directors and shareholders decide to place it in liquidation. The voluntary process gives directors more control and say over the course of the process including avoiding legal action/winding-up petitions, and frozen bank accounts.
Leases can be terminated
Leases and any hire purchase agreements are usually terminated once a company is liquidated. Especially in cases where the lease is not of any benefit to the liquidator. If there are any arrears to be claimed then the debt will rank as an unsecured claim in the liquidation.
It stops court action
A creditor may take legal action in respect of a debt and a director may be requested to attend court. If the company enters a voluntary liquidation, then going to court won’t be a concern.
Why not simply dissolve a company?
It’s a common misconception that a director can simply apply to dissolve a company and there will be no comeback. However, formal winding up of the company can more effective for the following reasons:
- Creditors can object to dissolution (fairly common, especially if there’s an outstanding amount owed to HMRC)
- A creditor can apply to restore a dissolved company for up to 6 years following the dissolution date.
- A recent change in legislation which give creditors, such as banks and HMRC, special power to investigate a company for any misfeasance in respect of a company’s financial affairs, following its dissolution.
- Dissolution is for solvent companies only – a company must be able to repay its debts within 12 months of closure, including any contingent debts (e.g. a pending employee or customer claim)
If your company has any debts due to a bank secured over any assets, then you should take expert advice to take the correct action, especially if the debt has been personally guaranteed.
How can FD Business Rescue help?
At FD Business Rescue, we aim to rescue, recover and renew businesses that are experiencing financial difficulty. It’s never an easy call when deciding to fold a business, but rest assured there is help at hand. So please get in touch or simply call 0800 652 0002 for free advice and peace of mind.