End of an era: company liquidation routes for struggling businesses

Guest post by Jonathan Munnery, UK Liquidators

The coronavirus pandemic continues to leave a visible footprint as it disrupts every sector, leaving no shopfront untouched. As each business, from start-ups to SMEs establish strategies to protect their livelihoods, the economic pressure deriving from Covid-19 has pushed unstable businesses over their last leg of trading.

As the pandemic continues to weed out the deadwood from those that are financially resilient, company liquidation is the next step for a host of unviable companies with restricted prospects.

As businesses across the country nervously count down until financial support from the government is withdrawn or they reach the end of their borrowed cash, the task of repayment is one only a fraction of businesses can realistically commit to.

The first and foremost step is to diagnose the business by establishing whether it can be repaired or if it has reached the end. We take you through the different types of company liquidation options for businesses in financial distress as a direct result of Covid-19.

Diagnosing the business

By conducting a thorough health check on the financial health of the business, you can determine whether it can be rescued or if it is a lost cause. The determining factors consist of whether the business has enough cash to repay creditors, maintain the daily running of the business and meet essential liabilities. If the business has limited cash flow, however, it is asset rich, a licensed insolvency practitioner can explore a suitable rescue procedure through which assets can be realised to repay creditors, such as Company Administration. If you are able to commit to affordable instalments through which to repay creditors, a Company Voluntary Arrangement may be the route forward.

If your business is past this stage, a cash flow and balance sheet test for insolvency can rigorously assess if the business is solvent or insolvent. By analysing income and expenditure, you can track whether the business is due to run out of cash and fall into payment arrears with creditors.

If you are no longer able to continue business operations due to depleting cash flow as a result of the coronavirus pandemic, a licensed insolvency practitioner can advise you on how to close the business cost-efficiently and conclude your affairs with creditors. A balance sheet test for insolvency will check if company liabilities outweigh assets, as if this is the case, the business is unlikely to fulfil repayments and could be contingently insolvent.

Creditors’ Voluntary Liquidation

If you voluntary opt to liquidate your business due to the slow accumulation of debt and growing creditor pressure, resulting in your business to be no longer viable, a Creditors’ Voluntary Liquidation (CVL) may be a suitable route to close your business efficiently. If you are no longer able to fulfil payments when they fall due, therefore disadvantaging creditors, a CVL increases the possibility of generating returns by realising assets during the liquidation process. To kickstart the liquidation process, an agreement should be made between company directors to liquidate the business.

  1. Appoint a licensed insolvency practitioner – A licensed insolvency practitioner will confirm that the business is insolvent by carrying out the necessary checks, initiating the CVL process or advising on the best route forward. A formal agreement will be made by company directors to liquidate the business.
  2. Informing creditors and shareholders – The insolvency practitioner will compile a report summarising the affairs of the business, including assets, liabilities, trading activity and company accounts.  This will be made available to creditors, including a specified decision date and intended date of liquidation.
  3. Company liquidation commences – During this stage, creditor and employee claims will be resolved, company assets will be realised, and the returns will be distributed to creditors in line with the priority order set by the Insolvency Act 1986.  An investigation into the company director(s) will also take place to ensure that all the prescribed duties were fulfilled, as failing to do so could hold the company director personally liable for the debts of the business.
  4. Company struck off – Following the liquidation of the business, the company will be removed from the Companies House register. 

Compulsory liquidation

This is a common liquidation route which is forced upon businesses as a direct result of creditor action by failing to make repayments. If your business is subject to a winding petition, it can be forced to liquidate if the order is granted by the court. This is the final and most extreme step which can be taken by creditors, including HMRC, setting the repayment process in motion through the company liquidation process.  

Is this the tip of the iceberg for struggling businesses?

Once government financial support as a response to the coronavirus pandemic ends, it is likely that businesses already on the brink will once again be left unprotected, bearing the full financial burden of the pandemic. As further disruption to trade continues following lockdown restrictions and local curfews, it is likely that this blow to trading, paired with the withdrawal of financial support is likely to result in the number of UK insolvencies to soar.

As weaker businesses continue to fail due to the pressures of the pandemic, many companies have weathered the storm and continue to grow thick skin against turbulent trading conditions. Businesses are continually being tested as public health guidance fluctuates, underlining the importance of enforcing business continuity measures in the event of economic instability.