How do I know when it’s time to liquidate my company?

When is the right time to liquidate my company?

Liquidation involves selling a business’ assets and using the proceeds to repay debts as far as possible. The company is then permanently closed down, but there are two forms of insolvent liquidation to consider:

• Compulsory liquidation - a creditor forces you into liquidation
• Creditors’ Voluntary Liquidation (CVL) – a formal procedure that can be initiated by directors

So why would you want to place your own company into liquidation?

Choosing voluntary liquidation over enforced liquidation

When you wait for a creditor to force your company into liquidation you risk increasing the financial losses of creditors as a whole. This directly contravenes insolvency laws in the UK and is a breach of your obligations as a company director.

Creditors’ Voluntary Liquidation does incur professional fees, and given that the business is insolvent it may appear counter-intuitive to incur further costs in this way. It’s possible to mitigate this issue, however, as you and other directors may be eligible to claim director redundancy pay and use it to cover the costs of the process.

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How to know when it’s time to liquidate your company

There are three tests for insolvency that you need to be aware of:

• Cash flow test: you can’t pay the bills as they fall due
• Balance sheet test: the company’s liabilities (including contingent liabilities, such as pending claims against the company) are greater than its assets
• Legal action test: creditors have taken action against you through the courts, such as a Statutory Demand or a winding up petition

It’s advisable to formally establish whether the company is solvent or insolvent. Seeking advice from an insolvency expert can help you avoid accusations of misconduct further down the line – failing to cease trade when insolvent, for example.

So what are some of the warning signs of insolvency that could prepare you for potential liquidation, and when might that prospect become a reality?

What are the warning signs that you might need to liquidate?

These are just some of the signs that can lead to insolvency and ultimately require you to liquidate your company:

• Lack of cash
• Additional pressure from creditors and suppliers
• Being unable to collect your own debts effectively
• Problems paying staff wages,
• Outstanding tax liabilities
• Increasingly high levels of bad debt
• Lack of reliable management information
• Inability to secure new lines of credit
• Legal action from creditors
• Visits from bailiffs

So what should you do if you think it’s time to place your company into liquidation?

Liquidating a company

You need to seek advice from a licensed insolvency practitioner when your company enters insolvency. They’ll guide you on your next steps, and if CVL is the only option you can take the initiative as directors and prioritise creditors according to UK insolvency laws.

A winding up resolution is passed when 75% or more of members vote in favour of liquidation, and the appointed liquidator then takes control of the company. The IP realises company assets and distributes funds to creditors, ultimately closing the company down.

There’s also an investigation into director conduct leading up to the time of insolvency, to make sure no misconduct has taken place. By seeking advice from a licensed IP and placing the interests of creditors first, however, you’re at less risk of serious allegations being made against you.

For more information on liquidating an insolvent company and the possibility of claiming redundancy pay as a director, please contact our team of experts at UK Liquidators. We’re liquidation specialists operating from a network of offices nationwide, and offer free same-day consultations to quickly provide the professional guidance you need.