Many companies today are reeling from recent economic factors. The pandemic has had a significant effect, compounded by the economic uncertainty caused by Brexit, along with other current events. Due to the heavy impact and persistence of these problems, it’s no surprise that many directors of struggling companies have decided to wind up their businesses.
Though it might be clear for some that now is the right time to close, the best way to do so isn’t always so obvious. Liquidation is one of the most used methods of closing a company, often being the most cost effective solution. However, liquidation is not a one-size-fits-all approach, leaving many directors looking for alternatives.
In this article, Clarke Bell will discuss three alternatives to company liquidation. Ensuring you can find the most cost-effective and practical method of closing your company.
What is company liquidation?
Liquidation is a formal procedure for closing a company. It is often a voluntary process, one used by directors looking to close their company for various reasons. A Members’ Voluntary Liquidation (MVL) is the ideal option for solvent companies, ensuring companies close in the most tax and cost-efficient way possible.
A Creditors’ Voluntary Liquidation (CVL) is ideal for insolvent companies. It allows directors to voluntarily liquidate their company, while upholding their obligations to creditors. However, if insolvent companies do not close via a CVL or take other action, they risk being forced into compulsory liquidation. This is the worst type of liquidation, stripping directors of any control and often ending in personal consequences for directors. As such, it should be avoided at all costs.
Though liquidation is a versatile option for closing a company, it isn’t always the best fit for the job. The situations of some companies aren’t fit for any kind of liquidation, and so directors must seek out alternatives.
Three alternatives to company liquidation
While liquidation is often the best solution, it is not the only option available to directors. If liquidation doesn’t meet your business needs, for example if you have neither assets nor significant debts, you could consider these three alternatives:
A company strike-off, often referred to as a dissolution, is the most used alternative to liquidation. It is a voluntary process, where directors of solvent companies apply to the Companies House to be removed from the register. Assuming a majority of directors agree with the strike-off, it can be initiated by filing a DS01 form. This can be done either online or with a paper form. If your company meets the criteria for a strike-off, the process can begin.
A company strike-off is the least expensive method of closing a company. A paper DS01 form will cost you £10, while an online application costs £8. For companies with too few assets to take advantage of the tax benefits provided by an MVL, a strike-off makes the most financial sense.
If you decide to close your company using a company strike-off, you must take care of your assets first. Assets and accounts still held in a struck-off company’s name will be transferred to the Crown. This is known as “bona vacantia”, and can make an otherwise cost-effective process quite expensive.
Company Voluntary Arrangement
If your company is struggling with debt, but you would prefer to continue operations than close, then a Company Voluntary Arrangement (CVA) could be the right alternative. This option is available to companies with a viable business model that can trade positively, and involves reaching a new agreement with creditors.
If a company’s creditors agree on a CVA, the company can continue trading as usual while making monthly payments to creditors for an agreed-upon term. This prevents creditors from taking action against the company during this time, protecting it from a compulsory liquidation. A licensed insolvency practitioner will oversee repayments during this term. Ensuring the company in question keeps to the terms of the agreement.
Though a CVA could be an ideal solution for your company’s debt problems, it is difficult to gauge using other examples. Every business’ situation is different. The terms of your CVA will differ from another, depending entirely on your company’s finances. As such, you should carefully consider whether the terms of your CVA suit your situation. Or whether you would be better off pursuing another course of action.
Administration is another alternative to liquidation that allows a company to continue trading in some form. This option is mostly concerned with rescuing a company and protecting it from creditors looking to recover their money. If it turns out that a company cannot be rescued, then the appointed insolvency practitioner will attempt to find a route other than liquidation to take. This might be an entirely new process, or liaising with existing creditors and organising repayments based on priority.
Administration is most often used to restructure a business or sell it. In many cases, a company entering administration will negotiate a sale beforehand, which is a process known as a pre-pack administration. This will result in the sale of the company and its assets to another company. Oftentimes, directors of a struggling company will use a pre-pack administration to create a new company with a viable business model. Then purchase some or all of the old one, transferring clients and employees in the process. While this can be an effective method of escaping debt, it tends to be viewed negatively by the public, and can result in legal issues if executed improperly.
Administration can be a suitable alternative for directors attempting to rescue a company with a viable core, or who want to find a better alternative than simply winding up. It can also be useful for companies that need more time to consider their options, but want protection from creditors. If you are considering administration, you should appoint an insolvency practitioner and discuss your options thoroughly. With their professional advice, you may find a preferable alternative.
Clarke Bell can help
No matter your chosen path forward, or whether you are undecided, Clarke Bell can help. We have assisted companies in finding the best solution to their problems for over 28 years. We can do the same for you. Contact our team today for a free consultation, and find out what we can do to help.