How to close an insolvent company

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If your business is experiencing financial distress and creditor pressure because  you no longer have the funds to meet essential payments and fulfil financial commitments, your company may be days away from being forced into compulsory liquidation. An indebted creditor may choose to launch formal action against your company to kickstart the repayment period by winding up your business. This could result in the involuntary closure of your company if you are unable to settle outstanding debts or come to an agreement with creditors.

If you wish to voluntarily liquidate your business because  it is insolvent with no possible future in view, a Creditors’ Voluntary Liquidation may be a suitable route. This involves repaying creditor debts and winding up your insolvent company. Both company closure routes provide an exit solution to insolvent companies with no viable futures, administered by a licensed insolvency practitioner.


What is Compulsory Liquidation?

Your company can be forced into compulsory liquidation as a result of a Winding Up Petition (WUP) issued against your company. A Winding Up Petition is a formal request typically issued by a creditor to force your business to close and liquidate assets, for which the returns generated will be used to settle creditor debts. The petitioner must be owed a minimum of £750 and have waited 21 days for repayment to be made before taking such action. After a Winding Up Petition is issued, this will be advertised in the Gazette, making it a matter of public record, inviting other creditors to submit claims.

You will then be required to attend court where a Judge will issue a Winding Up Order if the petition is successful, forcing your business to cease trading. An Official Receiver, also known as the liquidator, will exercise control over your company to assess the financial position.

Company assets will then be liquidated to generate funds which will be used to repay creditors. Any remaining debts will be written off and the company will be dissolved and removed from the Companies House register, ceasing in legal existence. If you signed a Personal Guarantee Agreement, you will be held personally liable for the repayment of this business debt, unprotected by the limited liability status of your limited company.


What is a Creditors’ Voluntary Liquidation?

A Creditors’ Voluntary Liquidation is a formal insolvency procedure, suitable for insolvent businesses with no prospects. Company directors are legally bound to act in the best interests of creditors and seek insolvency or liquidation advice in the event of financial difficulty to protect the business.  A CVL is typically the result of months of operational turbulence due to dwindling cash flow and a deteriorating balance sheet. The cash flow and balance sheet test can be used to establish whether the business is failing or can be rescued.

A licensed insolvency practitioner will take on the role of the liquidator, determined to maximise asset realisation to deliver a return to creditors. Any remaining debt will likely be written off and the company will then be liquidated.


What happens during the liquidation process?

To successfully enter a CVL, the company director(s) and 75% of company shareholders must agree to place the company into liquidation. During the liquidation, the insolvency practitioner will work with creditors to settle their claims after generating returns from realising assets. This will be distributed in line with the priority order established by the Insolvency Act 1986.

The insolvency practitioner will also delve into director conduct to ensure that the business was navigated in the best interests of creditors. If you are found guilty of wrongful trading, you could be held personally liable for the debts of your business. Seek advice from a licensed insolvency practitioner to ensure that you take an informed approach and do not fall foul of misfeasance as this could have serious repercussions. If you are bound to a personal guarantee agreement, you may be held personally liable for the debts of your business. If you are already suffering from personal debt problems, speak to a debt recovery or sequestration expert if you reside in Scotland.


For more information read Rocket Lawyer’s guides on insolvency, liquidation and closing a limited company.

If your business is struggling because of the coronavirus crisis see what support is available to you on our Coronavirus business legal centre.

Jonathan Munnery
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