Once a company becomes insolvent, it can be difficult for directors to decide on the right path forward. Balancing the company’s finances against creditor pressure can be very tough, but when the situation reaches a certain point, closing down the company must be considered.
However, this option isn’t as straightforward as it may seem at first. Insolvent companies have a plethora of rules and regulations applied to them, with even more following companies that go into liquidation. As such, it is strongly advised that directors enlist the aid of a licensed insolvency practitioner (sometimes referred to as a business liquidator) as soon as possible. They can help you through your chosen insolvency procedure, taking on much of the workload, while keeping you away from legal pitfalls.
But what exactly does a business liquidator do? In this article, Clarke Bell answers this question, breaking down the role of liquidators, and what they can do for your company.
What is a business liquidator?
The term business liquidator is sometimes used when referring to a licensed insolvency practitioner / liquidator…i.e. the professional who is appointed to facilitate the liquidation of a company.
The company’s situation determines the specifics; if it is pursuing liquidation voluntarily, whether it is solvent or insolvent, the company’s directors can choose their liquidator. However, if a company is forced into liquidation due to a winding-up petition, the courts will appoint a liquidator instead.
The specifics of a liquidator’s job depend on the insolvency procedure. A Members’ Voluntary Liquidation (MVL) is for a solvent company and where retained profits are distributed amongst the shareholders, once any liabilities have been taken care of. Things are a bit different for the liquidation of insolvent companies, which typically use the Creditors’ Voluntary Liquidation (CVL) process where the liquidator will focus on creditor interests and ensuring their needs are met.
What does a business liquidator do in practice?
Before deciding to use the services of a business liquidator, it is a good idea to understand the specifics of what they do. This will help you assess whether a business liquidator is suitable for your company, and, if so, ensure your insolvency procedure is implemented smoothly.
Members’ Voluntary Liquidation (MVL)
During an MVL, a liquidator will carry out the liquidation process, realising assets, and distributing the proceeds amongst the company shareholders. If you are eligible, you can obtain Business Asset Disposal Relief, formerly known as Entrepreneurs’ Relief. This relief entitles shareholders to significant tax savings on profits below the lifetime limit of £1 million. As profits made from liquidating assets are taxed as Capital Gains under an MVL, the savings for companies can be staggering.
Creditors’ Voluntary Liquidation (CVL)
If your company is insolvent, and requires the implementation of a CVL, your liquidator will have additional responsibilities. While the process follows similar throughline as an MVL, your liquidator will be focused on ensuring creditor needs are met, as opposed to those of the shareholders. Liquidation will still proceed similarly to an MVL, with assets being disposed of, accounts emptied, and the proceeds distributed to the relevant parties. However, there are some differences. As the company is insolvent, care must be taken to ensure no ‘transactions at undervalue’ are made.
This refers to selling an asset at an unusually low price, a practice that is often interpreted as an attempt to direct company assets away from creditors. Your business liquidator will help you to avoid making such transactions, in addition to helping you avoid any other potential legal missteps. Once all assets are sold off and accounts emptied, your liquidator will wind up the company and have it removed from the register kept at Companies House.
As part of the CVL process, there are some legal protections afforded and obligations that must be upheld. Firstly, your company will be protected from legal action upon the start of the CVL process. This protects you from creditors attempting to file a winding-up petition with the courts, resulting in the compulsory liquidation of your company. In addition to this protection, any debts that remain at the end of the liquidation process will be written off. Your personal finances will be left untouched, unless you have signed a personal guarantee as part of a particular loan agreement.
Your business liquidator also has legal obligations; namely, they must open an investigation into your insolvent company to determine whether director misconduct played a role in the company’s financial decline. This is typically done as a formality, with the intention of confirming that director misconduct was not present; this investigation does not mean you are suspected of breaking the law. However, serious consequences can be applied to guilty directors if director misconduct is found.
Consequences will depend on the severity of any misconduct found, and can include the disqualification of your directors’ license for up to 15 years, fines, personal liability for company debt, and in particularly egregious cases, a prison sentence. Your liquidator will report their findings to the Insolvency Service, regardless of whether director misconduct is present or not. The Insolvency Service can then decide if a more thorough investigation is warranted, and if misconduct was already found, what punishments are applicable.
Let Clarke Bell help you
If you are considering putting your company into liquidation, let Clarke Bell help you.
We have more than 28 years of experience in helping directors find the best path forward for their companies. Our team of experts can address your company’s specific requirements, whether you need a Members’ Voluntary Liquidation or a Creditors’ Voluntary Liquidation or another option.
Contact us today for a free, no-obligation consultation and find out how we can help you.