Cash flow problems can affect any business. With careful management and proactive changes to the structure or operations of a business, these issues may prove to be temporary, and many companies go on to recover and thrive. However, in some cases, these challenges will lead to formal insolvency proceedings. Under these circumstances, recovery options may be limited, and you may find that the only way forward is to go into voluntary liquidation.
While this is never the outcome that a company director wants, it may be better than some of the alternatives. There can be legal consequences for a business that continues to trade while it is insolvent, and the stress of debt can continue to build if business owners do not take action to resolve them and pay the money they owe. There is also a risk that creditors will apply for a winding-up petition to shut your company down, so you should explore your options and take action as urgently as possible when your business starts to face debt challenges.
How can a company enter voluntary liquidation?
The process of entering voluntary liquidation will begin with the directors of a company, who must decide that this is the right option for the business. It can help to discuss your options with experts before you decide on a path forward, as there may be other company recovery solutions available that could help you to appease creditors, remove pressure and give you time to pay the money you owe.
If voluntary liquidation is the only suitable option, you should speak to an insolvency practitioner. They will be able to advise you and begin to manage the liquidation process. The first stage for the insolvency practitioner will be to gather evidence on your business’s current financial situation and prepare a report for the creditors. Suppose a voluntary liquidation is to move ahead. In that case, a company’s creditors must vote on and agree to the appointment of a liquidator. A directors’ report helps to illustrate the business’ current circumstances and articulate why liquidation is necessary.
This report will include a list of the company’s assets, which will include physical items, stock, work-in-progress, and details of any debtors. It will also contain information about shareholders from the company’s statutory register, extracts from accounts, and a complete list of creditors. The report will also include a history of the company’s activity.
What happens once the liquidation process begins?
Once directors have decided to pursue voluntary liquidation, the company must immediately cease to trade. The directors will remain in their positions, but all other employees will be made redundant – the appointed insolvency practitioner will manage communications with creditors and employees and be responsible for obtaining details of redundancy pay, outstanding wages, and other financial claims. While they remain in place, directors must not act in any way that will devalue the business.
The business’ creditors will be given notice of a virtual creditors meeting and offered the opportunity to review and approve the directors’ report. In most cases, creditors will approve the appointment of a liquidator, as it is often the best way to ensure that they receive a dividend.
If the appointment is approved and the liquidation moves ahead, the insolvency practitioner will begin selling the company’s assets and paying its debts. In most cases, company directors are found to have acted responsibly in their management of the business, and as a result, there are no legal consequences for them. However, in circumstances where a company director is found to have engaged in unfit conduct, they may be disqualified from becoming the director of a company for a period of between 2 and 15 years.
Unfit conduct can include a failure to maintain accurate accounting records, misusing business assets or using them for personal gain, or continuing to trade while the company was insolvent. However, in most cases, there is little to worry about as a company director, provided you have acted appropriately, and there are no restrictions to prevent you from starting a new company or continuing to act as a company director.
Certainly, there is a lot of stress and emotional difficulty associated with the liquidation of a company, but seeking expert business finance advice at the earliest opportunity and choosing the right practitioner to manage the process can make the experience much easier. More than that, it can help to relieve you of the stress of business debts, prevent creditors from taking legal action or chasing you for payment, and offer a way out of a tough financial situation. If it looks like your business will be unable to pay its debts when they are due and you are facing insolvency, contact an expert at the earliest opportunity and explore your options for company rescue before things get worse.