Voluntary liquidation allows a company to terminate its operations and sell off assets and for any shortfall to be dealt with.
Some companies are liquidated because they serve no further purpose. Some are liquidated as they have unfeasible operations or poor operating conditions or technology has moved on. Others are liquidated because the founder has retired or passed and the business cannot operate without that expertise. Some have been affected by the failure of a large customer, the loss of a major contract or an extraordinary event, like Covid-19.
Most companies advance an insolvent liquidation because:
• The business cannot pay its debts as and when they fall due.
• Liabilities exceed total assets.
• The business is making losses and there are minimal prospects to turn it around.
• The directors are finding it hard to cope with the stress and pressure of trading.
• Trading is in decline and there is concern of personal liability for trading insolvently
• The directors would like someone else to deal with the creditors and all their claims.
Struggling companies juggle the payment of debts, are often in receipt of formal demands or statutory demands and commonly are on instalment plans with Inland Revenue or certain suppliers that they are having difficulty honouring.
When a company is facing financial distress and having trouble paying its creditors including GST and PAYE, there is a high chance that the business is already insolvent. Company directors who operate an insolvent business must act in the best interests of creditors and cease trading immediately if there is no realistic prospect of recovering from the financial difficulties being experienced.
When a company is in too much in debt to recover from a turnaround strategy or restructuring procedures such as company compromises or voluntary administration, liquidation is often the only viable course of action.
Liquidating leads to dissolving the failed company structure and bringing all activity of that company to a close. It is a way for a company that has run out of funds to deal with the shortfall to creditors.
What is the role of the liquidator?
The role of the liquidator in an insolvent liquidation is essentially to realise the company's assets, and, where possible, to make a distribution to the creditors.
The liquidator also conducts investigations into the failure of the company, the conduct of its directors and, sometimes the conduct of third parties, like creditors.
What steps do you take if your limited liability company has no future?
An insolvent company is generally wound up voluntarily by the shareholders or on a Court application by a creditor. A licensed insolvency practitioner (IP) is appointed to oversee the liquidation process.
The liquidators take steps to realise the company assets and pay outstanding creditors according to a designated hierarchy set out in the Companies Act 1993. If there is a shortfall the creditors receive their entitlement and the balance is written off or possibly pursued under a personal guarantee if one has been granted.
If the company has sufficient funds to pay all creditors, it is solvent and surplus funds are distributed among shareholders according to their percentage shareholding.
If the company is solvent, the company can be wound up following a S218(1)(d) strike off process or by way of a solvent liquidation process. The latter can provide more certainty for companies with larger capital gains.
Why would you initiate liquidation voluntarily?
The process of voluntary liquidation is less stressful than facing a winding up proceeding following a creditors application to the Court. The voluntary appointment can be planned in advance to minimise disruption and the shareholders have the opportunity to select the licensed insolvency practitioner who will manage the entire process. The appointment process is fairly straightforward.
Liquidation may not necessarily mean the end of the business. It may be that the business assets are sold at market value as a going concern and a new company takes over. The IP decides on the best way to maximise value for the creditors and whether that involves closing or trading whilst the business is marketed for sale. With a voluntary process the plan can be discussed prior to the appointment including how staff are managed and assets realised. Often directors can have an involvement or a say in the process because it is in their interests to maximise the recovery and minimise the exposure to creditors who hold personal guarantees.
What are the risks of trading an insolvent company?
Although a company structure provides limited liability, this does not mean directors can ignore matters if financial problems arise. Directors have legal obligations to adhere to certain standards. Acting earlier reduces the risk of personal liability.
Continuing to trade with knowledge of insolvency is a risk, where you could find yourself as a director being held personally liable for trading.
Once a director or shareholder knows their company to be insolvent, they must not engage in any activity which could worsen the position of creditors or increase their losses any further. Directors should not increase debt, incur further credit, dispose of assets below market value, or increase their overdrawn current account.
If you do not have sufficient funds to pay everyone you owe, you place your creditors at risk of receiving a voidable transaction if they have knowledge of the demise of your company.
What steps do you take if your limited liability company is in financial difficulty but you have a viable business?
If your limited liability company is facing financial distress but the business is viable, gain advice from a professional. A licensed insolvency practitioner will be able to talk you through the options for rescuing the company (restructuring), giving you the best chance of a successful turnaround, while also ensuring you are adhering to your duties as a director.
There are options such as a hive down process (new company structure), creditor compromises (current company structure with a repayment plan for creditors), voluntary administration (current company with a Deed of Company Arrangement).
For advice, contact the MVP team.