If you are a director of a company which is struggling and you feel that there is no possibility of turning the business around, you will need to formally close the company down. The process for doing this is known as Liquidation. The Liquidation process will require realising the assets of the company and distributing any proceeds to the company's creditors. Any cash left over is returned to the shareholders. The company is then closed, any outstanding leases cancelled and remaining staff made redundant.
Depending on the status of the business there are different types of Liquidation. Should your business be in a position to repay all the people it owes money to, then you will be able to liquidate the company using the Members Voluntary Liquidation (MVL) process. This is a simple process where the business is closed and all creditors paid in full. Any remaining assets or cash is then the property of the shareholders of the business to do with as they wish.
In the current economic climate it is unfortunately more likely the decision will be taken to liquidate a business because it is no longer a viable trading entity. The company may have run out of cash and owe more money to creditors than it cannot afford to pay. If no further options for raising investment can be found the business is forced to stop trading. In these circumstances the directors can either of the following two options:
1) initiate a Creditors Voluntary Liquidation (CVL) themselves
2) leave the company dormant until it is forced into liquidation by one of its creditors (often the Inland Revenue) through a winding up order.
It should be noted that once a company is liquidated by either of these options, the liquidator will report on the conduct of the Directors in the period up until it stopped trading. If the liquidator believes that the directors did not act properly during this period (particularly in the area of minimising the creditors losses), then they can accuse the directors of wrongful trading. If this is upheld then directors could be banned from being a director in any new or existing business, and face personal liability for the company's debts.
As a director of a business which is to be liquidated, it is therefore very important to make sure that the possibility of being accused of wrongful trading is minimised. Generally, where the directors of the business have initiated the closure of the business through a creditors voluntary liquidation, they are much more likely to be able to show the liquidator that they have acted properly. However, if directors seemingly abandon their duties and leave the company to be wound up, it is far more likely that the appointed liquidator will take a less favourable view of their conduct.
Given this situation, when I am asked by directors whether it is better to initiate a creditors voluntary liquidation process or simply abandon the company and wait for it to be compulsorily wound up, I always recommend the CVL route. In this way the directors are far more in control of the process and the risk of wrongful trading and disqualification is decreased.
Author Resource:-
Derek Cooper is Managing Director of Cooper Matthews Limited (http://coopermatthews.com), and a member of the Turnaround Management Association UK.
Cooper Matthews specialise in Business Recovery Services offering straight forward insolvency advice for businesses with financial problems. They have significant experience in working with small to medium sized businesses.
More information is available at http://coopermatthews.com/company-liquidation.html
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