A Guide for Small Business Owners
I have helped, restructured and turnaround many businesses from financial ruin (London Fields Brewery to name one).
Most my clients had at some point gone through similar processes and through planning and professional help, we were able to turn the corner and still have a business at the end of it, even if in a different shape. Its not easy but can be done.
Numbers are staggering - 234,000 small businesses have stopped trading due to Covid-19, and 1 in 5 small businesses won't survive another lockdown, according to new research.
Although the chancellor has announced another round of emergency measures in a bid to help keep the economy going, I recently commented that he has simply not gone far and fast enough to get the financial support to those businesses in need. I have friends, who are small business owners and are looking at the inevitable doom that they might not survive and will go out of business.
With many small businesses seeing their income plummet (including my clients) with some considering throwing down the towel, I have decided to write this #howto post, hoping to give some advice and guidance, in what it is a long hard process.
So, if you are thinking about to wind up your company, stop for a moment and read this first.
How To Wind Up Your Small Business
Being an owner, means you need to take control of the situation and seek professional help as soon as possible if you want to wind up your small business. Although people might want to do this by themselves, in order to save costs, my advice is always, always... always seek professional guidance by contacting a licensed insolvency practitioner. Their technical advice will give you what is your best option for dealing with your company’s situation and debts.
What Is a Voluntary Liquidation?
For most insolvent companies, winding up of a small business involves a process called a Creditors’ Voluntary Liquidation (CVL). A CVL starts when the directors, and owners, decide to close their business as they cannot pay their creditors. The company must be insolvent for this to happen. Liquidating your company voluntarily via a CVL – as opposed to being forced into compulsory liquidation (avoid this route if you can) – will go some way to protecting your business reputation in the future.
Voluntary Liquidation VS Compulsory Liquidation
Compulsory liquidation happens when a company is forced by creditors, usually after the approval of a winding up petition in Court.
A winding up petition is a legal notice put forward to the court by a creditor. The creditor petitions to the court if they are owed more than £750 and it has not been paid for more than 21 days. The application, in effect, asks the court to liquidate the company as they believe the company is insolvent. Proceeds of the liquidation can be used to pay back creditors. HMRC issue the majority of petitions and represent about 60% of all petitions. After approval, the Official Receiver will take over, freeze bank accounts and begin the investigation into what led to the company’s insolvency.
A liquidator will be appointed if there are assets to recover. The proceeds from this will cover the cost of the liquidation. Any remaining funds will go to the creditors, however it is unlikely that they’ll receive anything like the full amount owed. An investigation into the directors conduct is carried out as a statutory duty of the official receiver whether or not there is any evidence of wrong doing.
A Statutory Demand is sent to your company for payment within 21 days.
If this remains unpaid, the creditor can petition the court for a winding up order.
You have seven days in which to take action to prevent the liquidation of your company.
Once the winding up petition is advertised in the Gazette., your company bank accounts will be frozen.
The ensuing winding up order essentially means the end of your business.
Company assets are liquidated to repay creditors.
There are several issues that directors need to take into account when their company is liquidated in this way:
Timing – waiting for a creditor to issue a winding up petition can be a lengthy process. Creditors must pay to do this so they are only likely to take this step as a last resort. While waiting for your company to be wound up you are running the risk of accumulating further debts and are likely to experience ongoing creditor pressure.
Impact of employees - If you have staff you should remember that they are only able to claim redundancy and other statutory entitlements once the company is liquidated. By holding off on initiating this process voluntarily and waiting for a creditor to wind you up, you are delaying your employees receiving the redundancy they are entitled to.
Responsibility to creditors - As the director of an insolvent company you have various legal duties; one of these is to put the interests of your creditors first and to not partake in any behaviour which may worsen their position. Seeking the advice of a licensed insolvency practitioner during the early stages of your company's insolvency can help you adhere to these responsibilities and prevent further losses.
What Is The Winding-up Process?
Your company needs to have stopped trading before liquidation proceedings can start. The owners/directors must provide the practitioner conducting the insolvency process the following:
Two forms of identification for each director and all shareholders who hold 25 per cent or more shares in the company;
Completed history and information gathering questionnaire and completed pension questionnaire;
A full list of creditors, including name, address and amount outstanding;
A full list of employees who have been made redundant;
Copies of the last three years accounts, if applicable;
The practitioner prepares all the documentation that is required for the CVL process to wind up the business and will liaise with any required external parties such as The Royal Institution of Chartered Surveyors (RICS), valuers for valuing any company assets. Dependant on the company’s articles of association, a company could be placed into liquidation within approximately 7-14 days.
You Must Hold Two Company Meetings
You must hold two company meetings. At the Board meeting, the company directors formally agree that the company is insolvent and cannot continue to trade. The directors would also agree to appoint their chosen insolvency practitioner as the liquidator of the company, as well as agreeing for the necessary meeting of members to be summoned.
These board meetings are generally held at the director’s home or office and it is not essential for the insolvency practitioner to attend. The members’ meeting is normally held approximately 14 days after the board meeting and can be convened at short notice, should the statutory percentage of members agree to this.
This meeting would usually be held at the insolvency practitioner’s offices and the company directors must attend. Before the meeting starts, the company’s books and records should be provided. With the second meeting concluded, the company is now in formal voluntary liquidation :(
A meeting of shareholders is called, during which 75% (by value) need to agree to pass a winding up resolution.
A licensed Insolvency Practitioner is officially appointed to liquidate the company.
A creditors’ meeting is held within 14 days of the resolution. This meeting must also be advertised in the Gazette.
A Statement of Affairs is presented at the creditors’ meeting, detailing the company’s financial position. This will also be sent to Companies House.
You Must Ratify The Appointment Of The Liquidator
Once the members’ meeting has been held, the creditors must ratify the appointment of the liquidator. Under the new insolvency rules, there is no longer a requirement to hold a physical meeting with creditors to ratify the appointment of the liquidator. Your appointment is now deemed as accepted, unless sufficient creditors object to this. This is the “deemed consent procedure”.
During the liquidation process, creditor interests take precedence over those of directors, shareholders and members. Directors must act with integrity and are obliged to provide the IP with all the information needed to carry out this process.
You can always provide a “virtual meeting of creditors” so they may attend by conference call rather than in person. The insolvency practitioner keeps a register of any objections. Now, if 10 per cent of creditors who would be entitled to vote at a meeting do object; then the deemed consent process automatically terminates, and a physical meeting needs to take place - this is known as 10/10/10 threshold.
It is only possible for creditors to requisite a physical meeting, for one to be summoned it must be explicitly requested by either:
10 per cent of the total creditors (by value); or
10 per cent of the total number of creditors; or
10 individual creditors
If enough objections to the deemed consent procedure are received, the physical meeting will be convened within three days and the directors notified they must . The practitioner will make every effort to ensure that it is held on the same day as the members’ meeting
Pay The Taxman!!!
As the company gets into cashflow difficulties, some directors choose not to pay the taxes that are due to HMRC (Corporation Tax, PAYE, VAT and National Insurance Contributions). However, if the company continues to pay other parties (suppliers), these payments may be “preferential” payments and seen as the detriment to HMRC.
In the event of insolvency, this may lead to director’s disqualification. This is one of the most common reasons for considering someone is unfit to be a director. Under the Company Director Disqualification Act 1986 (CDDA), a director can be disqualified for between two and 15 years (ouch!)
An insolvency firm will investigate these payments and any matters relating to the conduct of the directors and the affairs of the company. They are required by law to submit information to The Insolvency Service about the directors conduct within three years prior to the liquidation. This happens within three months from the date of liquidation.
In short... settle your HMRC taxes. Be honest at all times.
Sole Trader VS Limited Company
As a sole trader you are the sole owner of your business, meaning that sole traders and unregistered partnerships do not receive the same level of protection as a Limited Company. Therefore, once a winding up order has been made against your business, owners and partners must personally contribute to the debts of their business if the company assets are not sufficient to cover the company’s debts.
A limited company is a business structure that has its own legal identity, separate from its owners (shareholders) and its managers (directors). This remains the case even if it’s run by just one person, acting as shareholder and director.
I have guided many companies through both processes and truth be told - compulsory liquidation is hard work. To start, you are not in control, it's soul crushing, its long hours going through emails, invoices, paperwork but above all...it destroys all those meaningful business relations you developed throughout the years with your suppliers, customers, clients, staff and even HMRC, which can stop you from starting again and have another go.
My #ultimateadvice would be to take action first! Put yourself in control of the situation and dont let debt, creditors, suppliers or staff, take control of YOU and how this process runs.
I can say most my clients had at some point had to go through
similar processes and through planning and professional help, we were able to turn the corner and have a still have a business at the end of it, even if in a different shape. Its not easy but can be done.
If you are in a similar situation and would like some help, guidance or just exchange war stories, get in touch - it costs £0 firstname.lastname@example.org
And remember, when there's a will, there is a way!
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