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Frequently asked questions about Liquidations

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Posted in: Liquidation 16 Mar 21

What is a Creditors’ Voluntary Liquidation?

Creditors’ Voluntary Liquidation (CVL) is the process where the Directors of an insolvent company can voluntarily take steps to wind up the company. The Directors call a meeting of the company’s shareholders to consider resolutions to wind up the company and decide on a decision procedure for creditors to appoint a Liquidator.

How do you know when a company is technically insolvent?

It will be evident that a company is insolvent if;

  • Its liabilities are greater than its realisable assets
  • It cannot pay its liabilities as they fall due
  • It now has legal action being taken out against it

What are Directors responsibilities when a company is insolvent?

Once you agree a company is insolvent, it cannot meet its debts, Directors must be mindful of their fiduciary duty and take swift action.

  • Seek advice from an insolvency practitioner
  • Cease trading
  • You should avoid putting creditors into a worse position
  • Avoid incurring any new liabilities
  • Avoid making preference payments
  • Avoid taking any income from a business other than wages properly incurred.

How long will it take to liquidate a company?

It can take anywhere between 4-6 weeks to take a company into Voluntary Liquidation. The company will remain in liquidation until the liquidator has completed his/her investigations and reported back to creditors.

There are 4 key steps involved in taking a company into Voluntary Liquidation:

  • The company discusses matter with an Insolvency Practitioner.
  • All options are considered so Directors can make an informed decision.
  • A meeting of shareholders and a virtual meeting of creditors are held and resolutions passed to take the company into liquidation and appoint a liquidator.
  • The liquidator takes control of the company. Asset are liquidated and the affairs of the company leading up to the liquidation are investigated and reported on.

What if a Director has signed a personal guarantee?

If you have signed personal guarantees (PG) for any type of lending to the company, then you will become personally liable if the company is unable to pay. The liquidation could lead to these being called in by the lender. There is little that can be done to avoid this, but this shouldn’t mean you avoid taking the correct action, like liquidation, if a company is insolvent.

Most lenders will want to negotiate an affordable repayment for a PG over an agreeable period of time, to reduce their exposure.

Can a Director and Employees claim redundancy in Liquidation?

Any person employed by the company (including Directors), that have been paid via PAYE for over 2 years, may have a claim for redundancy, arrears of pay, holiday pay and pay in lieu of notice. If the company is unable to pay employees, then they can make a claim through the Government’s Redundancy Payments Service (RPS) after the company is in Liquidation, subject to limitations.

What happens to a Bounce Back Loan in liquidation?

A Bounce Back Loan (BBL) will rank among all other unsecured creditors in a liquidation. There will not be any personal guarantee, so the bank cannot pursue the Director/Shareholder for repayment of this debt. The liquidator will however investigate how funds were used in the company.

What happens to a Coronavirus Business Support Loan in liquidation?

A Coronavirus Business Support Loan (CBIL) is a loan due by the company first. If the company has insufficient funds/assets to repay the loan when in liquidation, then any shortfall of up to 20% may be claimed personally by the Director/Shareholder that has guaranteed the loan.

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Aftab Zahoor

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