There were some interesting statistics that reported recently that April 2020 was the lowest month for liquidations in over 6 years.
That seems like an astonishing statistic in the middle of the biggest economic crisis for over a hundred years.
But of course the main reason is what we might call forbearance. For various reasons entities that might usually be issuing winding up orders (HMRC, banks, large corporates) are not doing so. What’s the point? They aren’t going to get paid any more by forcing a company into liquidation that has no trade at the moment.
And on top of that there are a variety of government protections which have been put in place to protect companies at the moment.
In addition, the most likely persons to put a company into liquidation are it’s directors and shareholders. And the various help available (furloughing, retail and hospitality grants, CBILs and bounce-back loans) have tided most businesses over so it’s owner-managers have not found themselves forced to make a decision.
In fact, some of our clients are having their best cash flow for years because they are being paid for the work they did before the crisis began but are not paying anything out for materials or labour. Their problem will come when they start getting busy again.
But underneath all that there are many businesses which are slowly sliding into insolvency and a crunch point is coming. Quarterly commercial rents are due on 25th June and furloughing will probably be phased out over the next few months.
Many companies will find that they are below their Real break-even point and will need to make redundancies. But the cost of those redundancies might make an already fragile position worse and be the cause of the company being unable to continue.
So what are your choices?
Do you want to cease trade and walk away?
If so, liquidation may be the best option for you.
As long as 75% of the shareholders agree (based on share numbers), they can appoint an Insolvency Practitioner (IP) to deal with the situation. The IP will contact all the creditors by sending out Notice of a Decision Procedure, asking if the creditor if they have any objection to the shareholder’s nominated IP. If there is no objection the Company moves seamlessly into creditors voluntary liquidation.
The creditors don’t have to agree and can nominate their own IP to undertake a liquidation. Creditors votes are based on amounts owed so one large creditor can out-vote everyone else. HMRC is often the largest creditor so will have this power, but on the whole tend to remain neutral.
Once the IP has been appointed to undertake a liquidation, they no longer work for the directors but instead work for the creditors. The IP has now become the Liquidator.
By now, the company will have ceased to trade, and the Liquidator will attempt to sell its assets for the best price and collect in money due. This cash is then used to pay outstanding liabilities in a particular order (Usually employees and the liquidators fees take priority, and other creditors such as Directors and shareholders are at the end of the pecking order).
As a director you will be immediately free to become the director of another company and, assuming there’s no wrongful trading or misfeasance, the closure should not impact your personal finances. The Liquidator will carry out an investigation into the conduct of the directors and, depending upon the outcome of that investigation, the directors may subsequently face disqualification proceedings by the Insolvency Service.
Do you want to carry on trading?
If you wanted to continue trading, it is possible to setup what is generally referred to as a ‘phoenix company’. This is fundamentally a completely new company (Limited, LLP, or even a Sole Trader) that negotiates with the IP to buy the assets of the old company at market value.
This approach is often abused and has a bad name as creditors see someone trading in one company one day and then setting up again the following day with their liabilities gone.
In many cases though, it is the only option for the owner-managers of the company. They will still need to earn a living and this allows them to do so.
But it is not without significant drawbacks. Contracts with customers may be terminated (many contracts contain cessation clauses for exactly this situation), the owners will need to find money to re-purchase the assets, the new company will have a zero credit rating and it may take several years to build the business back up again. There are also rules regarding the re-use of the company name which must be adhered to.
Hierarchy of creditors
In both situations, there is a hierarchy in which creditors are paid and it is as follows:
- Secured creditors with a fixed charge: Fixed charge holders are often banks and other asset-based lenders who hold title over a business asset. When a fixed charge is provided to the lender your company loses the right to sell or trade the item.
- Preferential creditors: This includes employees entitled to arrears of wages.
- Prescribed Part creditors: The prescribed part applies where the Company has granted a floating charge to a creditor after 15 September 2003. Where a floating charge over the Company’s assets has been given, a prescribed amount of the Company’s net property, after paying liquidation costs and expenses and preferential creditors’ claims, must be made available to the unsecured creditors.
- Secured creditors with a floating charge: Assets subject to a floating charge often include stock, raw materials, work-in-progress, fixtures and fittings – basically any other assets not subject to a fixed charge. Assets of this type can be traded in the normal course of business. Floating charge creditors are entitled to receive a distribution from the net property of the company (the amount remaining after the application of costs)
- Unsecured creditors: These include trade creditors, suppliers, customers, contractors, some staff claims, plus HM Revenue and Customs.
- Shareholders: Shareholders are the final group to be paid. Because they have taken a business risk in providing money to the company, they are not entitled to a distribution until all other creditor groups have been paid. This will also include the Directors of owner managed businesses.
For most of our clients, we hope that you will not have to do anything as drastic as this. But it’s important to know your options. Many companies struggle on for years under the weight of debt constantly “robbing Peter to pay Paul” and end up going into liquidation anyway. Sometimes a clean slate can be the best alternative as hard as it is.
If you feel that you are not going to be able to trade through the current crisis, please contact one of our Principal Advisers on 01474 853 856and we will arrange a meeting with our preferred Insolvency Practitioner so you get the right advice for your situation.
On Thursday, we’ll cover the alternatives to liquidation.
Contact me today!
Malcolm Palmer FCA | Managing Partner | 01474 853856
Malcolm.firstname.lastname@example.org | Send me a message