What are the consequences of not winding up a business?

Winding up a business can be a confusing and detailed procedure. Whether you’re a company director or you belong to a company that is struggling financially, getting to know the winding up procedure and understanding exactly what is involved can appear daunting.The first thing to do as a company director finds a company with extensive experience when it comes to company debt, someone who can help you create a business rescue plan to work on the winding up procedure moving forward.

How you proceed will be determined by a number of factors, including whether you’re a private company, a public company, if you have chosen liquidation voluntarily or whether you are being forced into liquidation. There is member’s voluntary liquidation, this is when the company is still solvent and is still in the position to repay its debts before closing the doors. This is suitable when you realize that your company may not have a future or may have simply run its natural course.

Typically, an MVL is used to release cash or valuable assets from the company in a tax efficient manner. You must also be exceptionally careful when signing the director’s resolution, the Declaration of Solvency when filing for members voluntary liquidation. Any falsified information can have very severe consequences. It is your responsibility to ensure that all the information provided when submitting your application is accurate and true.

The second option that should be considered during the winding up procedure is creditor’s voluntary liquidation or CVL, this is when the company is officially insolvent. A company becomes insolvent when it can no longer pay its bills or its liabilities, including contingent liabilities, outweigh its assets. So, in simple terms selling off all the company assets would not completely repay the company creditors.

During the winding up of a business, you will have engaged the services of an insolvency practitioner who becomes the liquidator once approved by the creditors. What many company directors don’t realize is that the liquidator actually acts on behalf of the creditors, not the directors and will take over the entire company from the minute the liquidation process starts. Your main priority and legal responsibility are to provide the liquidator with all the information, bank statements, invoices and more than they need to close the business successfully.

During the winding up procedure of a business you will find that once the assets have been sold and the liquidator has collected all the cash, all your secured debts will be paid in the first instance. From here your employees will be paid and then the remainder will be shared out among your unsecured debts. Be very careful if you have signed any personal guarantees on any debts for the business, which is quite a common undertaking in the business world. If you have, you should seek professional rescue/insolvency advice as soon as possible preferably prior to engaging a liquidator.

It is critical to understand that once engaged the liquidator will act on behalf of the creditors of the company and is not allowed by law to act on the director’s behalf. There is a duty of care where personal guarantees are involved but can be easily overlooked in the heat of liquidation. Where there are personal guarantees or other personal concerns technically these should be placed on the back burner. The key is to speak to a turnaround or company insolvency consultant who is allowed to look after and advise you on your personal matters throughout the liquidation.