Voluntary liquidation is an effective way to close an insolvent business, however the costs involved often puts directors off thereby making their situation worse
Here, we’ll explain the total cost of voluntary liquidation, so you know exactly what to expect if you’re in a situation where you need to consider it.
1) When should I consider voluntary liquidation?
Voluntary liquidation is when a company’s directors choose to close the company down and disband. The process is quite straightforward:
- First, the company appoints a licensed insolvency practitioner as the liquidator
- Then, control of the company is handed to the liquidator and the business ceases to trade
- The liquidator sells all of the company assets
- The liquidator removes the company from the Companies House register
There are two core types of voluntary liquidation, so it’s important to understand which one your company is facing.
- Members’ voluntary liquidation – This occurs when the company has enough assets to cover its debts. The directors must make a declaration of solvency before proceeding.
- Creditors’ voluntary liquidation – This is a popular method for closing down insolvent businesses. 75% of creditors must agree with the liquidation proposal put forward at a creditors’ meeting.
It is important that directors assist their liquidator in all areas. They must hand over company assets, records and paperwork, and agree to interviews if requested.
In a creditors’ voluntary liquidation (CVL) it’s important to remember that the liquidator acts in the interest of the creditors, not the directors. If the liquidator finds that a director’s conduct was ‘unfit’, the director could face fines, or even disqualification for 2-15 years.
2) What’s the cost of voluntary liquidation?
The initial cost of voluntary liquidation is usually between £4,000 and £6,000 + VAT.
This covers the cost of hiring an insolvency practitioner to act as liquidator and organise the creditors’ meeting. It also includes the preparation of the statement of affairs and section 98 reports.
Further liquidations costs will accrue as the process moves forward. This is because the liquidator will perform a wide range of duties during this time, which include:
- Advising directors of their duties
- Settling legal disputes or outstanding contracts
- Making people redundant and processing their claims
- Collecting debts, including those owed by company directors
- Meeting deadlines for paperwork and keeping the relative authorities informed ie Companies House, HMRC, Insolvency Service and Department for Business Energy Innovation and Skills
- Investigating transactions prior to the liquidation to check for discrepancies and obvious preferences/undervalued transactions.
- Alerting creditors to progress every 12 months and involving them in decisions where necessary.
- Valuing and realising assets
- Distributing monies to creditors and accounting for them.
The cost of voluntary liquidation – excluding the initial fee – is charged according to time spent, usually over a period of five years.
How do companies pay for voluntary liquidation?
Proceeds from the sale of the company’s assets usually pay the costs for three different areas:
- The cost of voluntary liquidation
- Money owed to creditors
- Shareholder debts
However, the second and third tier only receive funds after payment of the cost associated with the previous tier. Therefore, as the process continues, it could become increasingly unlikely that shareholders will receive the full amount owed to them.
Sometimes the cost of voluntary liquidation cannot be met through the sale of assets. In such cases, liquidators will require payment in advance.
When this occurs, or directors require a more efficient process, directors often pay for liquidation out of their own funds.
The cost of voluntary liquidation can be daunting, but this process is the correct way to close an insolvent company and stop the position getting worse. It can help protect directors from wrongful trading accusations, stop the risk of personal liability, ensure all staff are paid compensation quickly and perhaps most importantly spare the director time to get on with their life.
If you think that voluntary liquidation might be right for you, talk to our experts at Company Rescue today.