When is liquidation a good idea for your business?
Starting your business can be an exciting time for you, your family and your business partners. However, no matter how ambitious or driven you are, sometimes it just doesn’t work out. What then?
If your company is struggling to pay any money it owes, then it may be time for you to consider insolvency and liquidating assets. If you find yourself in this position, here’s what you need to know before you may have to start proceedings.
What is insolvency and liquidation?
As a director of a limited company, you need to consider whether to stop trading – and, if you do, then you’ll need to decide how you close your business. Your company is insolvent if:
- It cannot pay debts when they are due.
- It doesn’t have assets that, if sold, would pay off these debts.
- It cannot pay debts when they are due and the sale of assets wouldn’t pay off the debts either.
The amount of assets your company has will determine how you can close it. There are a number of liquidation options to go for once you have decided that your company is insolvent.
What liquidation options are available for my insolvent business?
Depending on your financial situation, you could consider a creditors’ voluntary liquidation. This is when you appoint an insolvency practitioner (IP) – who specialises in insolvency and liquidation – to close your business. However, your company will need to have enough money to pay the fees for an IP.
An IP will sell your company’s assets, pay its creditors, deal with your company’s affairs – then close it. Any outstanding company debts will then be written off; you will still need to pay any personal debts. Your conduct as a director will also be investigated by the IP.
If your company doesn’t have the money for an IP, then it may need to go into compulsory liquidation. A creditor can bring forward a winding-up petition for your business if standard methods to recover the money have failed. This action means that your company is forced to liquidate its assets so they can be sold – and the proceeds can be distributed to your creditors.
Other options include having your company struck off (where, if your company cannot afford to pay for liquidation, its name can be removed from the company register) or go into administration. An IP can carry out the administration and then look at restructuring your company so it can continue trading. They may also consider selling assets and close the company.
How do you liquidate assets?
You will need to identify the business assets to liquidate first. List physical property owned by the company, and any money it is owed. This can include:
- Business equipment (e.g., computers, phones, credit card machines)
- Office furniture and supplies
- Real estate
- Security deposits
- Prepaid insurance premiums you can be refunded
You may also be able to sell items such as commercial leases, contracts with suppliers and customers, work in progress, plus intellectual property. Find buyers for your assets, and make sure you get a good price at fair market value for them.