Are there alternatives to liquidating a limited company without using an Insolvency Practitioner?

“I can’t afford to liquidate my company. What are the alternatives to liquidation?”

This ia question we are often asked. When directors are facing the stressful task of closing their limited company, the cost of appointing a Licensed Insolvency Practitioner (IP) to run a formal procedure, such as a Creditors’ Voluntary Liquidation (CVL), can seem daunting  There are alternatives to liquidation that can be explored, and in this article we look at some options, all of which can deliver a degree of short-term relief but can also come with some risks for directors. Apart from Compulsory Liquidations (for further details please see below) only Licensed IPs can be appointed to run a liquidation process, whose expertise ensures compliance, efficiency and an orderly winding up of the company involved.

Voluntary Strike-Off

A voluntary strike-off is an affordable method suitable for companies without outstanding debts*. This is the cheapest way to close a limited company, but it is only appropriate for businesses that are solvent.

(*For example, we find that some companies have their strike-off request rejected by Companies House when they have either a debt with HMRC or an outstanding Bounce Back Loan.)

The key steps are:

1. Ceasing to trade: You need to ensure your company is no longer trading, and has no outstanding debts and no outstanding tax returns.
2. Notify Interested Parties: Inform creditors, employees, and shareholders of your intention.
3. Submit Form DS01: Complete and send form DS01 to Companies House along with the filing fee.
4. Await Confirmation: If no objections are raised within two months, your company will be struck off the register and dissolved.

Considerations:

– Objections from creditors can halt the process.

– Directors remain responsible for company affairs and liable for any outstanding debts until dissolution.

– Any remaining assets pass to the Crown as bona vacantia (Duchy of Cornwall).

Negotiating with Creditors

Direct negotiation with creditors can provide a viable solution for companies with debts, not least because creditors often prefer a repayment plan rather than a formal liquidation which can be costly as well as lengthy.

The key steps are.

1. Open Communications: Reach out to your creditors. It is always better to talk than avoid addressing the issue.
2. Propose Repayment Plans: Suggest realistic and affordable payment terms.
3. Document Agreements: Keep records of all negotiations and adhere to the agreed terms.

Considerations:

– Informal agreements such as these lack legal protection.

– Creditors are not obligated to agree and can still take action.

Using Debt Advice Charities

Charities and not-for-profit organisations like Step Change, Business Debtline and Citizens Advice offer free support and guidance.

The key steps

1. Contact a Charity: Explain your financial situation.
2. Follow Guidance: Use their resources and advice to manage your company’s debts.

Considerations:

– Charities can provide valuable support but may not offer comprehensive solutions.

– Professional assistance might still be required for complex situations.

Compulsory liquidation

The other route is a Compulsory Liquidation, whereby the Company waits for a creditor to force the company into a liquidation via a Winding Up Petition, or the Company itself petitions for a winding up.  There are however, costs attached to presenting a petition (where an Official Receiver is initially appointed), and there are many risks associated with this route, not least lack of control over the process, the length of time that the process can take, and the directors’ conduct being closely scrutinised for evidence of misconduct and wrongful or fraudulent trading, which can lead to fines, director disqualification and/ or personal liability for the company’s debts.

(See this article for the difference between a CVL and a Compulsory Liquidation.)

The importance of employing an Insolvency Practitioner

While the above options can provide temporary relief (with the exception of a compulsory liquidation), the expertise of an IP is crucial for a smooth and compliant liquidation process, and peace of mind for directors knowing that all matters have been properly and professionally dealt with. If a business is insolvent, it should not be dissolved as it could at a later point be restored which could have dire consequences for all concerned. The best option all round is usually to close a company via a CVL.

Benefits of a CVL:

– Legal Compliance: Ensures proper handling of creditor claims, including employee claims and accurate submission of documentation.

– Creditor Relations: Manages communications and negotiations with creditors.

– Directors’ Interests: Guides directors through their responsibilities, thereby reducing risks of personal liability.

– Asset Realisation: Maximises chattel asset value for creditors. Even if the company has no money, and if there are no physical assets that can be auctioned, there may be still potential intangible assets that can be realised for payment of creditors after realisation costs have been paid.

– Peace of Mind: Reduces stress and allows directors to focus on recovery.

Talk to an IP if your company is struggling financially

While alternatives to liquidation and appointing an IP exist, their expertise and guidance will ensure a more efficient and legally compliant process. Investing in a professional can save you time, stress, and potential legal issues in the long run.

If your company is struggling financially, the earlier you talk to an IP, the more we are likely able to do to help turn things around. Only if absolutely necessary will we recommend a liquidation.