CONSIDERING LIQUIDATION
Considering liquidation? Understand your position before you decide.
If your company is struggling to pay its debts, liquidation may be one of the options you are considering. Before making that decision, it is important to understand the company’s financial position, the alternatives that may be available and any issues that could affect you personally as a director.
Company Debtline gives you a confidential place to start.
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Considering liquidation? What directors should understand first.
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Prefer to choose a time? Book a call.Liquidation is Not the Only Option
Financial difficulty does not automatically mean that a company has to be liquidated. Equally, continuing to trade is not always the right answer simply because it may be possible.
The right decision depends on the company’s financial position, whether the underlying business remains viable, the level of creditor pressure and what you want to achieve as a director.
For some companies, there may be a realistic route to stabilise the position, deal with creditors and continue trading.
For others, liquidation may provide an orderly way to bring the company to an end.
And sometimes a director simply reaches the point where they no longer want to continue carrying the financial pressure, uncertainty and stress of running the business.
Company Debtline assists Company Directors in understanding their options and personal exposure and provides, clear, jargon free guidance in deciding their next steps.
What actually is Insolvency and what does it mean?
A company experiencing financial pressure is not necessarily insolvent, and understanding the difference can help you make sense of your options.
There are two principal tests commonly considered when looking at insolvency:
Cashflow insolvency
A company may be cashflow insolvent where it is unable to pay its debts as they fall due.
In practical terms, the company might have a healthy order book, valuable assets or customers who owe it money, but if it cannot meet HMRC, wages, suppliers or other liabilities when payment is due, there may be a cashflow insolvency issue.
In simple terms: Can the company pay what it owes when it needs to?
Balance sheet insolvency
A company may be balance sheet insolvent where the value of its liabilities, taking account of relevant future and contingent liabilities, exceeds the value of its assets.
A company can therefore appear to be functioning normally and still have an underlying balance sheet problem.
In simple terms: Does the company owe more than it is worth?
A company can be cashflow insolvent, balance sheet insolvent, both, or experiencing financial pressure without necessarily satisfying either test. The overall position needs to be considered rather than looking at one unpaid creditor in isolation.
Are any of these happening in your company?
Financial difficulties often build gradually. A company can still be trading while several warning signs are developing at the same time.
- HMRC arrears are increasing — VAT, PAYE or Corporation Tax is overdue and the company is struggling to catch up.
- Suppliers and creditors are chasing payment — Payment dates are being missed and creditors are becoming increasingly concerned.
- Cashflow is no longer keeping up — There is not enough money coming into the business to meet liabilities as they fall due.
- You are using borrowing or personal funds to keep trading — New borrowing, credit cards or money from directors is being used simply to cover existing commitments.
- Legal pressure is increasing — The company is receiving demands, court claims, enforcement threats or winding-up correspondence.
- You are worried about your own position as a director — There may be personal guarantees, an overdrawn Director’s Loan Account or other transactions you are concerned about.
If several of these sound familiar, it is worth understanding the position before the pressure increases further.
What does putting a company into liquidation actually mean?
You may have heard terms such as CVL, insolvency practitioner, liquidator and creditors’ meeting without really knowing what they mean.
We keep it simple.
A Creditors’ Voluntary Liquidation, usually shortened to CVL, is a formal process used where the directors conclude that a company cannot continue and should be closed.
A licensed insolvency practitioner is appointed to deal with the company’s affairs. This can include its assets, creditors, outstanding liabilities and other matters relating to the company.
But liquidation is not a decision that should be made simply because the company is experiencing financial pressure.
The starting point should be understanding the company’s position and what the different options could mean.
THE COMPANY
Understand what may happen to the business, its trading activity, assets and liabilities.
THE CREDITORS
Understand how debts owed to HMRC, suppliers, lenders and other creditors may be dealt with.
THE DIRECTORS
Identify matters that could affect you personally rather than discovering them later.
THE NEXT STEP
Understand when formal insolvency advice is appropriate and what the process may involve.
The questions directors usually want answered first.
For many directors, the biggest concerns are not about the technical liquidation process. They are about what happens to them personally.
Will I personally have to pay the company’s debts?
A limited company is generally responsible for its own liabilities, but there can be circumstances where a director has personal exposure. Personal guarantees, Director’s Loan Accounts and certain transactions are examples of matters that should be considered separately.
What happens to my Director’s Loan Account?
If the accounts show that you owe money to the company, this can become important in a liquidation. Understanding how the balance has arisen and whether it is accurate should be dealt with as early as possible.
What happens to personal guarantees?
Liquidation does not normally make a personal guarantee disappear. If you have guaranteed company borrowing or other liabilities, the terms of the guarantee need to be considered separately.
What happens to a Bounce Back Loan?
A Bounce Back Loan is normally a liability of the company rather than the director personally. However, the way company funds have been used and the circumstances surrounding the borrowing can still be relevant.
Can I be a director of another company?
Entering liquidation does not automatically prevent somebody from being a director of another company. There can, however, be separate restrictions or issues in particular circumstances.
What happens to employees?
Employees may be affected when a company enters liquidation, including through termination of employment and potential claims for certain employment-related amounts.
What you do before liquidation can matter.
When a company is under financial pressure, directors often feel they need to do something immediately.
That might mean paying one creditor ahead of another, putting more personal money into the business, taking additional borrowing, selling assets or moving money around simply to keep the company going.
Those decisions can sometimes have consequences later.
If liquidation is becoming a realistic possibility, it can be sensible to understand the position before making significant financial decisions on behalf of the company.
If you are unsure what to do next, speak to someone before taking action.
A straightforward place to start.
- 01
TALK
Tell us what is happening with the company and what is causing you concern.
- 02
UNDERSTAND
We help identify the financial, creditor and director issues that may need to be considered.
- 03
GET CLARITY
We explain the position in straightforward language without unnecessary jargon.
- 04
NEXT STEPS
Where formal insolvency or other specialist assistance is appropriate, we explain what the next step is and help you access the appropriate support.
Free, confidential and without obligation.
Not ready to speak to someone?
You can start with our Free Company Debt Assessment. Answer a few questions about the company’s financial position, creditor pressure and circumstances to get an initial indication of the areas that may need attention.
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- Takes only a few minutes
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Frequently asked questions
How do I know if my company should be liquidated?
There is no single answer that applies to every company. The company’s debts, cashflow, assets, creditor pressure and ability to continue trading all need to be considered before deciding what action is appropriate.
Can I liquidate a company that owes HMRC money?
HMRC debt is commonly present in companies experiencing financial difficulty. Its existence does not, by itself, prevent a company from entering a formal insolvency process.
Do I have to stop trading immediately?
Not necessarily. Whether trading should continue depends on the company’s individual circumstances. If you are unsure, this is something to discuss promptly with an appropriate specialist.
How quickly can a company be placed into liquidation?
The timescale depends on the circumstances and the process being used. A licensed insolvency practitioner can explain the formal steps and likely timetable if liquidation becomes the appropriate route.
Will liquidation affect my personal credit rating?
A company liquidation and a director’s personal financial position are separate matters, although personal guarantees or other personal liabilities may have their own consequences.
Will my conduct as a director be looked at?
A liquidator has statutory responsibilities relating to the company’s affairs and the conduct of its directors. This is another reason why it can be helpful to understand your position before liquidation rather than after it.
You do not need to decide on liquidation today.
Start by understanding your position.
If you are worried that your company may need to close, speak confidentially with Company Debtline about what is happening and the issues you should understand before deciding what to do next.
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