The decision to close shop will mainly be influenced by whether the business is solvent or insolvent and if your decision to shut shop is voluntary or forced as a result of legal action from creditors. The second factor which is a highly common and unavoidable driving force behind inevitable company closure is the natural ageing of a business or owner retirement, resulting in voluntary liquidation, writes Jon Munnery of UK Liquidators.
These factors split the roads available to you into three, the first being company liquidation which is essentially the end-result of a winding up petition from a creditor to recoup outstanding funds, forcing your insolvent business into compulsory liquidation. The second is the insolvent liquidation route, better known as a Creditors’ Voluntary Liquidation, to liquidate assets to repay creditors and then dissolve the business. The Members’ Voluntary Liquidation for solvent businesses is designed to enable company directors to conclude affairs, extract funds efficiently and close the doors of their company. We run you through each route available under the guidance of a licensed insolvency practitioner.
Your business can be forced to liquidate as a result of legal action taken against you by creditors in the hope to raise funds to repay outstanding debts. This is a formal insolvency procedure which consists of liquidating assets and closing shop due to depleted cash flow. To successfully issue a winding up petition against a company in the UK, the creditor should be owed a minimum of £750 after a 21-day waiting period. The petition will be heard by the court and if granted, a liquidator will take control of the business with the view to recoup funds for creditors.
The role of the liquidator will be played by a licensed insolvency practitioner who will take control of the business to realise assets, returning the value owed to creditors where possible. Following this, the company will face dissolution and removed from the Companies House register, ceasing in existence. If your business is under threat of a winding up petition and you believe that this is wrong, you will be able to contest this during the early stages, however, you must have strong grounds to have the winding up petition dismissed.
Insolvent liquidation – Creditors Voluntary Liquidation (CVL)
A Creditors’ Voluntary Liquidation is suitable for insolvent businesses with no prospects of recovery as the business has run out of cash and is therefore unable to fulfil liabilities, including repaying outstanding creditors. If you arrive at the realisation that your business is no longer able to survive as it has accumulated debt, worsening the position of creditors, you can voluntarily appoint an insolvency practitioner to liquidate your business.
The liquidator will set sights on generating creditor repayments by liquidating company assets, including property, equipment, machinery and intellectual property. If every avenue has been explored by realising each asset belonging to the business, the remainder of the debt may be written off. If you have signed a personal guarantee agreement, you will be held personally liable for the repayment of this debt.
There is a legally established hierarchy of creditors which sets out the priority order in which repayments should be made. As the company director, you are required to show a duty of care to creditors so if your business is out of cash, it could be time to pull out of the game.
Solvent liquidation – Members’ Voluntary Liquidation (MVL)
If your business is solvent and therefore, financially healthy, performing strong and in the black, you will need to pursue a solvent liquidation as your business may have naturally reached the end of its lifecycle, you wish to retire or refocus your efforts elsewhere. A Members’ Voluntary Liquidation is suitable for viable businesses which can fulfil outstanding liabilities within the space of 12 months. The MVL process is appropriate for companies with over £25,000 in retained profit, including assets which can be distributed. If you have less, this route may be inefficient due to the associated costs, possibly resulting in dissolving the business to be the cheaper option.
This formal liquidation process enables you to extract funds and distribute them amongst shareholders in a tax-efficient manner. The funds paid out through an MVL will be through capital distribution and therefore taxed as capital gains, rather than income. Your tax liability can be further reduced to 10% if you qualify for Business Asset Disposal Relief, previously known as Entrepreneurs’ relief before April 2020.
Sell my business: An alternative to company closure
If you’re pondering on educating yourself or taking extensive advice on the avenues available to you as an alternative to company closure, you may turn to a business transfer expert to explore the business sale process. If your business is in sound financial health with a strong operational structure and a loyal customer base, you may be able to attract a reputable buyer. This route is common with exiting company directors due to owner retirement, personal health concerns or based on the decision to redirect investment to other business interests, deciding to exit inevitable.
By marketing your business for sale to prospective buyers when business performance is at an all-time high, you can maximise market value and generate strong returns, in addition to preserving the bones of the business and continuing the company legacy. An experienced business owner with a larger cash backing, industry experience and supplier contacts can help elevate the capabilities of the business, extending it to new heights to accomplish full potential.
This route is likely to demand more commitment, time and effort as you will be required to prepare your business for sale and conduct a business valuation to calculate financial worth to help establish an asking price. Upon determining a marketing strategy through a business transfer agent or privately, the task to source a genuine buyer will begin. This exit strategy can prove financially lucrative if your business is in a robust, marketable state as an alternative to a solvent liquidation.
The route you take to close your business can take the form of different company liquidation routes, mitigated by financial health, ongoing performance and debt to asset levels. To assess the viability of the business and to determine the best route forward, seek specialist advice from a licensed insolvency practitioner or a business rescue expert. A diverse range of factors will need to be taken into consideration, including the duties fulfilled by the company director before the business closes its doors, highlighting the importance of seeking proper guidance and taking an informed approach.