Are you a UK director looking for liquidation advice? Then look no further. We’ve developed this guide, which includes expert company liquidation advice tailored to your specific circumstances. Keep reading for the complete liquidation guide for UK company directors.
If your business is experiencing financial difficulties, then it’s vital that you access professional advice. Not accessing advice at all or accessing poor advice could land you in trouble as a director. The same advice goes for those who have solvent companies and are looking into liquidation.
At 1st Business Rescue, we have a team of specialist advisers on hand who can help with all business liquidation and recovery needs. We work closely with clients to ensure that you receive accurate advice depending on your personal circumstances.
In this article, we’ll be sharing the most important, free and impartial advice for UK directors. You’ll learn more about when to seek expert liquidation advice, the different types of liquidation, the processes, alternatives and life after liquidation.
When to seek expert liquidation advice in the UK
One of the most common things that UK directors struggle with is when they should seek professional advice. Here are some of the most common warning signs that you need liquidation advice for your company.
- Experiencing cash flow problems
- Increasing company debts
- Increased late or missed payments
- Overdrawn director’s loan accounts
- HMRC pressure
- Creditor pressure
- Poor financial management
Sometimes companies may experience some minor cash flow problems. These might occur as you wait for your client to pay for the services you have provided. In this case, you might know you are going to have the money to pay your own creditors back soon.
For other businesses, these same issues occur every month, where they struggle to pay their creditors the money they are owed. This is a certain sign that you have financial problems and should seek advice.
When you notice these warning signs, it’s crucial that you act quickly. The sooner you get advice, the better the outcome is likely to be. Unfortunately, many directors leave it too late to get advice, and they end up failing to adhere to their director’s duties. This can cause many problems and often doesn’t present the director in a positive light.
Expert liquidation advice: Insolvency vs solvency
When a company cannot afford to pay their debts when they fall due, it can be labelled as insolvent. These companies are likely to owe more money in liabilities than they have in assets. It’s crucial that these companies seek advice as soon as possible to reduce the risks of things getting worse.
In contrast, a solvent company can afford to pay its debts when they fall due. These companies are likely to have more money held up in company assets than they do in liabilities.
The liquidation methods you can select vary depending on whether your company is solvent or insolvent. We’ll let you know more about liquidation options in the UK later in the blog.
What are the consequences of delaying professional advice?
The exact consequences you may face depend on your personal circumstances. Ultimately, directors have their own duties to which they must adhere. If they fail to adhere to these duties, they may face the consequences, such as penalties, personal liability, compulsory liquidation or other issues. We’ll let you know more about compulsory liquidation later in the blog.
When a company becomes insolvent, the director has a duty to act in the best interests of its creditors. This means that they must seek insolvency or company closure advice. In this situation, you must speak to an insolvency practitioner. They can take a closer look at your situation and help you make the right decision.
Seeking professional advice early means that you can find the best course of action and minimise creditor losses, which is important.
Types of liquidation: Understanding your options
As we mentioned previously, there are various liquidation methods, but the right one for you depends on your personal situation.
Creditors’ voluntary liquidation (CVL)
A creditors’ voluntary liquidation is a formal insolvency process that results in the company being closed. At the beginning of the process, an insolvency practitioner must be appointed. It is only suitable for insolvent companies.
During the process, the insolvency practitioner will look for ways to pay back the company’s creditors. This will include taking actions such as selling company assets for money. This money can then be used to pay off a company’s creditors.
If there are no assets remaining, the company’s debts are generally written off, unless the director has personal guarantees or liabilities such as overdrawn loan accounts. In most cases, the director will face no issues. However, there are some instances that can lead to penalties, personal liabilities or director disqualification. These often come about following wrongful trading, which we will cover later in the blog.
Member’s voluntary liquidation (MVL)
A member’s voluntary liquidation is a formal solvency procedure that can only be used by solvent companies that can afford to pay their debts on time.
For this method to be successful, 75% of the company’s shareholders must agree to it. If less than 75% agree, then a different method must be considered. Companies with no debts and no bounce-back loans can use the strike-off method, an informal procedure, which is known as the cheapest way to close a company.
This process generally takes less time than a CVL, but you still need to appoint a licensed insolvency practitioner. They will ensure that all company payments are made and provide advice on shareholder money.
An MVL is generally recognised as a tax-efficient way to close a company, as directors can take their shares as Capital Gains Tax rather than dividends.
Compulsory liquidation
Compulsory liquidation is a formal insolvency procedure that is usually best avoided. This type of liquidation is forced upon company directors by their creditors. This usually occurs as the company in question has not paid their bill despite multiple opportunities to pay. Read our blog on what to do when a customer doesn’t pay their invoice.
After multiple attempts to get the money they owe, a creditor may begin court action against you. This usually begins with a winding-up order, which also includes a date by which payment must be made. If the payment is not made on time, then the company will be closed via a compulsory liquidation. As the name suggests, this is not the director’s choice.
A compulsory liquidation is always best avoided as it can reflect negatively on the director, as you have not acted within the creditors’ best interests and therefore have not adhered to your director’s duties. All of this can lead to increased director scrutiny, and you may not even be able to choose your own insolvency practitioner.
Pros of a CVL
A CVL is a common way to close a limited company due to its many advantages.
- All legal action against the company can be stopped and no further action can be taken
- Better chance of redundancy payments being available for employees and directors (although this does depend on meeting certain criteria)
- Directors maintain better control over the process and time frames, and they can choose their own insolvency practitioner
- Often provides a more favourable outcome for creditors
- Prevents the need for compulsory liquidation
Cons of a CVL
- Directors will be investigated to identify any wrongdoing
- Companies are required to pay for the liquidation process, which can be stressful if there is no money left over
- Employee redundancies are often unfavourable to directors
Pros of an MVL
- Significant tax advantages – use Capital Gains Tax rather than income tax
- Shareholders may be eligible for Business Asset Disposal Relief (previously known as Entrepreneur’s Relief)
- Insolvency practitioner ensures compliance
- Directors and shareholders are protected
- Shareholders can often access funds quickly
Cons of an MVL
- Shareholders must have the money to pay for the process, which involves a licensed insolvency practitioner and legal advice
- The process can sometimes take a long time, depending on the complexities
- MVLs are a public record, so anyone can see that the company is in the process
Pros of compulsory liquidation
- Puts an end to creditor pressure
- Allows the director to close a stressful chapter and focus on what’s next
Cons of compulsory liquidation
- Higher risk that the director will be made personally liable for company debts
- Loss of the business and its assets
- Tarnished reputation
- The director will be unable to use the same company name
- The director will face a thorough investigation
- The process often takes longer than a CVL process
- Employee job losses
It’s worth noting that these pros and cons vary depending on your personal circumstances. If you have committed wrongdoing or have an overdrawn director’s loan account, then you will likely be required to pay this money back.
All insolvency practitioners are required to complete a thorough investigation into the directors, so these things will be uncovered. You’re much better off being honest about these things in the beginning, as it will present you in a better light. However, you may still be found liable.
Expert liquidation advice: When should I use each option?
Creditors voluntary liquidation
This liquidation method should be used when you think the company is becoming insolvent. This means you cannot afford to pay the company’s debts when they are due, and the company’s liabilities are worth more than its assets.
Member’s voluntary liquidation
This can only be used by solvent companies that can afford to pay off any outstanding debts. At least 75% of the company’s shareholders must agree to the process. For it to be the most tax-efficient method, there should be at least £25,000 in the company accounts after all the debts have been paid.
Compulsory liquidation
Ideally, you wouldn’t wait for this process to come around, but if you cannot afford liquidation, it can be the only option.
In some cases, directors may not have the option of choosing a compulsory liquidation as it is forced upon them by their creditors.
The liquidation advice process
The liquidation process can feel quite daunting to those who aren’t sure about it. With our expert liquidation guidance and support, you will gain a better understanding of the process and be able to enter it with ease.
The first stage of the process involves an initial consultation. During this stage, the director should meet with an insolvency practitioner. The main focus will be on the company’s financial circumstances, so that the practitioner can get a better understanding of the options available to the director.
They will chat with you about the different liquidation options in the UK and help you decide on the best one for you. Once this has been discussed, they will delve deeper into any pitfalls and challenges that may arise during the process. The practitioner will chat with you about any potential issues with personal assets and future business ventures.
It’s important to note that directors can speak to multiple insolvency practitioners to find one that aligns with their needs. When you have these meetings, it’s vital that you ask how much the liquidation process will cost you. Ensure that the liquidator has checked all aspects of your business, including for an overdrawn director’s loan account. If this is not identified early, it can cause issues later down the line.
Additionally, it’s vital that you get all liquidation costs in writing as a protection for yourself. Otherwise, you may end up having to spend much more money on the process.
Expert liquidation advice: What documents do I need to prepare for liquidation?
There are lots of documents that you need to have in order to successfully liquidate your company. The exact documentation depends on the method you choose, but we’ll cover them all.
If you want your liquidation to be completed quicker, you need to make sure all of these documents are prepared early. This helps you save time. Here are the documents you need to have.
- A resolution from shareholders (MVL)
- A resolution from creditors (CVL)
- A declaration of solvency (if solvent)
- A statement of affairs
- Documentation of the insolvency practitioner’s appointment
- HMRC information
- Identification documents
- Company bank account details
- Company financial records
- A list of assets and liabilities
Your insolvency practitioner will let you know if there are any other documents that you need to share.
Expert liquidation advice: Questions to ask liquidation advisors
Before you select your insolvency practitioner, you need to complete some research into their background and abilities. Choosing the right liquidator is important, as they are responsible for the entire process.
As we mentioned previously, you can speak to multiple liquidators to find the right one for you. You need to ensure that the one you choose is registered as a licensed insolvency practitioner. Here are some key questions you might want to ask.
- Are you a licensed insolvency practitioner?
- What experience do you have dealing with cases like mine?
- What qualifications do you have?
- Can you provide an estimation of liquidation costs? (Make sure you get this in writing)
- Are there any potential disbursements?
- Do you check all aspects of my company, including overdrawn loan accounts, wrongful trading, etc?
- What level of support will you provide me with?
- How often will you communicate with us?
- How will you guide us on which liquidation method might be best for us?
- Will there be an investigation into the director’s conduct?
- What are my responsibilities as a director during the process?
- What rights do my employees have?
- Will I be held personally liable for company debts?
- What is the order of payments in liquidation?
- Can I be a director again following the liquidation?
- What is the estimated time frame for the liquidation to be completed?
- How will you ensure confidentiality during the process?
What’s the expected timeline for liquidation?
The exact time frame also depends on which method of liquidation you choose. This is a typical timeline for a creditor’s voluntary liquidation. Your insolvency practitioner should be able to give you tailored timeline advice based on the method you choose.
The time frames can vary based on the complexity of the case. For a company with minimal creditors and debts, the process can usually be completed quickly. On average, the liquidation process takes between 6 months and 2 years.
Initial consultation
This involves meeting with multiple liquidators, discussing your circumstances and deciding on the right liquidation method for you. It is usually a quick process and can be completed within a few days of the director deciding to close the company.
Following this, you will need to choose one of the insolvency practitioners and appoint them. From this point, they will be responsible for dealing with all creditor pressure and communication.
Liquidation
Liquidation itself takes the longest time in this process. As we mentioned previously, the more complex the case, the longer it will take to complete.
Part of the process involves the liquidator talking to your creditors and informing them of your plans to liquidate. Then, they will be invited to submit their claims for review by the insolvency practitioner. They will hold meetings with your creditors to ensure that the claims are accurate.
They will consider your company’s assets, realise them and make money to pay back your company’s debts. If there are no assets left in the company, then the creditors may not receive the money they are owed. If no wrongdoing is found, then the company’s debts are likely to be written off.
The insolvency practitioner will handle all aspects of the process, including dispute resolution and handling complex assets.
Final proceedings
When the assets have been sold and the creditors have been paid, the company can be dissolved. This means it will be removed from the Companies House register and will cease to exist.
There are no limits on the time that a liquidation can take. It’s best to be honest from the beginning and have the correct documentation ready to help speed the process up and get the most appropriate outcome.
What are the costs involved in getting professional advice?
In the first instance, directors are likely to be offered free liquidation advice during an initial consultation. This helps the insolvency practitioner to understand where you are at and how they can help you. If you decide to appoint them for your case, then you will pay their fees. Always get the liquidation costs in writing and ensure they have checked all elements of your business to protect yourself down the line.
Again, the exact cost of your liquidation varies depending on your circumstances and the method you use. A simple liquidation can cost anything between £3,500 and £7,500. VAT and other costs may be added to this price.
Expert liquidation advice: Director responsibilities and liabilities during insolvency
Many directors struggle to recognise their legal duties during insolvency, so it’s vital that you are clued up on these before the process begins. Generally speaking, directors have a legal duty to act in the best interests of their creditors and shareholders. This means that any action they take should benefit these people, rather than being for personal gain. The aim is to minimise losses for these groups of people.
Directors can adhere to these legal duties by seeking insolvency advice when necessary, stopping trading, safeguarding assets and cooperating with their liquidator.
It’s so important that directors adhere to these duties as it can prevent further issues down the line.
Directors should not prioritise one creditor over another by paying them off. This is called making a preference payment and is not an example of you adhering to your duties. It can also land you in trouble at a later date.
You are also required to attend all necessary meetings regarding the liquidation and provide all requested documentation in a timely manner.
What are the implications of a personal guarantee?
A personal guarantee is when a director makes themselves responsible to pay a debt if the company cannot. It acts as a protection for the creditor as they have a higher chance of being paid. Personal guarantees can create significant pressure for directors, especially during financial distress.
Due to this becoming a personal debt, the director can be pursued for repayment, which can lead to legal action and the seizure of assets. In some cases, signing a personal guarantee and not being able to pay it back can lead to bankruptcy.
Personal guarantees typically survive liquidation, as they are personal obligations. While rare exceptions exist (e.g., negotiated settlements or disputes over enforceability), directors should assume the debt remains unless advised otherwise. It is not labelled as a typical company debt in that it has the potential to be written off during liquidation.
It’s crucial that you deal with personal guarantees carefully and honestly. You should not rush to pay off this debt if your company is becoming insolvent, as it will be labelled as a preference payment, and you will remain personally liable for paying it back.
What are the risks of wrongful trading?
Wrongful trading is when a director continues to operate a business while knowing that there are financial difficulties in place. Directors are expected to cease trading if there is no reasonable prospect of avoiding insolvency. Trading while insolvent is an offence under the Insolvency Act 1986.
There are many risks associated with wrongful trading and here are just a few of them.
- Personal liability for company debts
- Disqualification from being a director again
- Penalties/fines
- Legal action
Common examples of wrongful trading include the following.
- Trading while insolvent
- Not minimising creditor losses
- Fraudulent trading
- Failing to monitor the company’s financial situation
- Failing to seek professional insolvency advice
Director disqualification considerations
In some cases, when a director has committed wrongful trading, they may be disqualified from being a director in the future. This can be stressful to deal with. The court will decide on the most suitable consequence for you. The disqualification can last for a specified period of time, depending on the complexities. Not only is this stressful, but it can also cause reputational damage for directors.
How good liquidation advice in the UK protects directors
Getting professional business liquidation advice early helps to protect directors in many ways. You must follow advice and adhere to your duties during the process. Here are some helpful tips for the process.
- Seek early intervention for financial struggles
- Mitigate your risks for wrongful trading
- Ensure that you are adhering to your duties
- Avoid personal costs
- Understand your legal obligations
- Protect yourself from personal liability
Ensure that your insolvency practitioner has understood your case correctly and can offer you the level of support you require.
Expert liquidation advice for specific situations
What happens to HMRC debt during liquidation?
When a company enters liquidation with HMRC debt, the debts remain with the company. HMRC is labelled as a preferential creditor, meaning that they get paid before many other creditors in the process. However, some employee wages and secured debts are paid first. You can speak to your liquidator to find out more about the order of payments in liquidation.
If a company does not have the money to pay off HMRC debts, they are cleared during liquidation. Note that this will not be the case if wrongdoing is found.
What happens to Bounce Back Loans and CBILS during liquidation?
These schemes were introduced at a vital time to help some businesses stay afloat. The loans were provided by many banks in the country, and they were guaranteed by the government. This means that if a company closed and could not repay the debt, then the government guarantee would step in, and the government would be responsible for paying the banks.
These are known as unsecured debts, which means they are unlikely to be repaid in full during the liquidation process. In most cases, directors will face no issues with this. However, if it is found that a director acted irresponsibly with the bounce back loan or CBILs money, then they may be found personally liable for this.
Bounce-back loans were approved purely for the benefit of the company applying for them, and not for personal gain. Additionally, the money must have only been claimed once by the company in question.
What happens to companies with valuable assets?
When a company enters liquidation, the insolvency practitioner’s role is to try and find money to pay back the creditors. One way that they do this is through the realisation of assets. In liquidation, all company assets, including stock, machinery and more, can be sold to pay back the company’s creditors.
What happens to companies with employee liabilities?
When a company enters liquidation, all employees are made redundant. Employees are then labelled as creditors, so they will need to claim unpaid wages, holiday pay and other payments in this way. If they cannot receive payment from the company, they will need to make a claim through the National Insurance Fund. Not all employees are entitled to redundancy pay, but it’s definitely worth checking if you are.
What happens to businesses affected by IR35?
IR35 is a legislation that means businesses are taxed in the correct way. Businesses seeking liquidation advice for an IR35 company should contact a professional adviser directly. Find out more about our IR35 support.
Expert liquidation advice: What are the alternatives to liquidation?
If a liquidation doesn’t feel like the right step for you, you might want to consider some other options.
Company voluntary arrangement (CVA)
A CVA is a formal insolvency procedure, which means a company can pay off their creditors over a specified time frame. An insolvency practitioner must be appointed to oversee the process.
This process allows directors to continue trading and maintain control over the situation. It also means that companies do not need to close down after the process. They should be in a better financial position to continue trading.
Administration
A company administration is a formal process used by insolvent companies. During this process, an insolvency practitioner is appointed to oversee the management and operations of the business.
The aim of the administration is to help businesses improve their processes. It can be rescued or sold as a going concern. While the process can be helpful for some businesses, it is a costly option.
Informal arrangements with creditors
Closing a business is a tricky decision to make, so it’s natural that directors may want to explore alternative options. Informal arrangements for payment may be negotiated by directors and the company’s creditors. Some of the benefits include increased flexibility and the removal of formal proceedings. In most cases, it means the business can continue to operate.
However, there are some aspects to be aware of, such as the creditor needing to agree to the terms and being able to trust that you can make the payment on time. You should ensure that you get the information in writing to avoid any misunderstandings.
When alternatives might be preferable
Choosing an alternative method may be preferable when there is no immediate threat of formal action, for example, liquidation. They may be beneficial for companies that are experiencing minor, temporary cash flow problems. You should have high confidence that these issues will pass.
| Insolvency Option | Pros | Cons |
|---|---|---|
| CVA |
|
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| Administration |
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| Informal Arrangement |
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Expert liquidation advice: How to choose a liquidation advisor
A liquidation advisor is also known as an insolvency practitioner or a liquidator. It’s vital that you choose a high-quality, licensed professional to help you through the process. Here are some qualifications to look for.
- Must be licensed
- Must have completed the correct exams – JIEB
- Must have experience
- Must be approved by a regulatory body
Red flags to look out for
Here are some of the most common red flags to look out for.
- They want you to pay before they give you any advice
- They give you a quote without knowing the entire situation
- They speak down to you
- They won’t put the details in writing
- They don’t check for overdrawn loan accounts
- They don’t answer your questions clearly
Expert liquidation advice: Life After liquidation
Life after liquidation can look different for many directors, as it depends on the circumstances of your case. Personalised director liquidation advice is available.
What are director restrictions?
Director restrictions are often only put into place when a director has committed wrongdoing. If this is the case, they may be disqualified from director’s duties, marketing or running a business for a set amount of time.
Can I start a new business after liquidation?
In most cases, directors can start new businesses after liquidation. However, there may be some restrictions in place regarding the name of the new company. If the company closes with unpaid debts, some creditors may require a security deposit to ensure they are covered if the same thing happens again.
Personal financial recovery
Most directors will be able to close their companies with no financial impact on themselves personally. Personal financial recovery is only really necessary when wrongdoing has been found.
Lessons learned from liquidation
Liquidation often offers directors the opportunity to reflect on valuable lessons for future ventures. Here are some common themes among UK directors.
- The importance of seeking advice early
- Understanding your legal obligations
- Recognising the impact that the process has on directors
- The importance of maintaining and updating financial records
We speak to many directors who have had positive outcomes following liquidation. It might seem stressful at the time, but it can be a valuable learning experience.
Expert liquidation advice: Frequently Asked Questions
How long does liquidation take?
There is no set time frame for how long liquidation takes. The process is usually longer for companies with more debt. On average, a CVL takes between 6 months and two years to complete.
What does an insolvency practitioner do?
An insolvency practitioner is responsible for dealing with creditor communication after you appoint them. They will assess your company’s assets, realise them and use the money to pay back your creditors. They may also conduct a director’s conduct report, focusing on the last three years before liquidation.
Will my credit rating be affected?
Your personal credit rating should not be affected by a company’s liquidation. This is because limited companies are separate legal entities from their directors. However, if a director has signed a personal guarantee and fails to pay back the debt, their credit score would be affected.
How much does liquidation cost?
Liquidation costs vary massively depending on the complexities of the case. You can expect to pay around £4000 for a small liquidation. This figure can also be affected by other liabilities. Seek personalised, expert liquidation advice for an accurate figure.
How do I know if my company is insolvent?
A company is insolvent if it cannot afford to pay its debts on time or its liabilities are worth more than its assets.
Can I use a strike-off method?
A strike-off method can only be used by companies that have no outstanding debts, and they do not have a bounce-back loan to pay back. Companies that attempt to strike off with debts will be identified and likely forced into compulsory liquidation.
What are the different types of liquidation?
- Creditors voluntary liquidation
- Compulsory liquidation
- Members voluntary liquidation
Can a liquidation be reversed?
Liquidation is rarely reversible once formally underway, especially after a winding-up order or appointment of a liquidator. However, in some early-stage cases, especially compulsory liquidation, there may be a legal route to halt the process if issues are resolved quickly
We hope this blog has been helpful regarding expert liquidation advice. At 1st Business Rescue, we are always on hand to support directors and help them achieve the most valuable outcome.
It’s vital that you seek personalised company closure advice for your situation. Please don’t hesitate to contact us if you need any support.
Justin Barker
I’m Justin Barker, the Managing Director at 1st Business Rescue. I have over 25 years of experience providing insolvency advice to business owners.
I understand how challenging it can be when dealing with financial difficulties within your business. It’s easy to ignore the problem and hope that it disappears, but this is often the worst thing you can do. Our dedicated team is here to provide honest, valuable advice to help UK directors deal with their personal situations in the most appropriate way.
No case or circumstance is the same, but I can guarantee that I am there to give you the best advice.
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