If you’ve been struggling to keep your company afloat, or have already reached the stage where it’s insolvent, you may be worried about what liquidation means for you and your business.

It’s certainly a challenging scenario. You have to deal with constant pressure from creditors, and this can prevent you from moving the business away from financial difficulty.

So what does liquidation mean in a practical sense, and how can it affect you as a company director?

What is business liquidation?

Liquidation involves selling business assets, and using the funds to pay creditors some of the money you owe. Unfortunately, the business must permanently close at the end of the process, which also means redundancy for any staff you employ.

Only limited companies can be placed into liquidation. If a sole trader business suffers unmanageable financial difficulty, creditors apply for a bankruptcy order against the business owner personally.

Two forms of liquidation exist in relation to businesses that can no longer pay their debts:

• Creditors’ Voluntary Liquidation (CVL)
• Compulsory liquidation

So what are the differences between these two procedures, and could one be better than the other for your business?

What is Creditors’ Voluntary Liquidation?

As the name suggests, Creditors’ Voluntary Liquidation allows you to place your company into liquidation voluntarily. Although the end result is the same as with compulsory liquidation in that the business closes down, the fact that you’ve proactively limited financial losses for your creditors is important.

Under UK insolvency law, when you know your company is insolvent, you’re legally obliged to stop trading and consider the interests of creditors above the company’s and your own.

The CVL process begins once a licensed insolvency practitioner has assessed the business and believes that CVL is the correct way forward. A resolution to this effect is made in the boardroom, and officially documented.

If sufficient shareholders and creditors vote for the CVL, your business’ assets are valued and sold at auction. Creditors are repaid as far as funds allow, and the company is removed from the official register.

What is compulsory liquidation?

Compulsory liquidation involves a creditor, or a group of creditors, petitioning the courts to wind up your company. You must owe a debt of at least £750, and if the court sanctions a winding up order, the Official Receiver (OR) begins the liquidation process.

As with CVL, your company’s assets are sold with a view to repaying some of the debts. Companies House are also informed so they can strike off your company from the register. 

Considerations for CVL and compulsory liquidation

Creditors’ Voluntary Liquidation

• Creditors’ Voluntary Liquidation allows you greater control over the process as a director, but you also have to pay professional fees to the liquidator

• You may be able to claim statutory redundancy pay if you work under an employment contract as well as being a director. This could help you pay the fees, repay some of the debts, or support your own financial situation.

• Placing your business into liquidation voluntarily suggests you’ve been fully aware of your financial company’s situation and have acted to help your creditors, rather than waiting for a creditor to enforce liquidation

• The Insolvency Service always investigates cases of liquidation, but the fact that you’ve considered the financial position of your creditors is a point in your favour

Compulsory liquidation

• Enforced liquidation incurs no professional fees, although the creditor’s court fees in making the winding up petition may need to be reimbursed

• The Insolvency Service investigation could be more stringent as your creditor has had to take action and incur more costs to recover their money

• Compulsory liquidation can lead to bad publicity, both in your business community and in the public realm

• This process is sometimes used by businesses that are earmarked for closure anyway, and if this is the case, the impact may be less significant

Realities of liquidation

Liquidation signals an unfortunate end to your business, but it’s always important to consider the people and other businesses you trade with. They’re highly likely to lose money, even though the sale of your assets is intended to repay them.

Unsecured creditors, such as suppliers and consumers, are most at risk of loss in this situation. Secured debts owed to your bank, for example, are given priority, and the asset(s) can be repossessed.

It would be worthwhile obtaining professional advice on liquidation if your company is in financial difficulty, as there may be other options. It’s always important to act quickly in these situations, though, as doing so could help to save the business.