Common Complications of Closing a European Company

Common Complications of Closing a European Company

Closing down a business is never an easy or welcome decision, but with the right advice the process can at least be straightforward and relatively stress free.

Here we take a look at the alternative processes available for company dissolution and focus on some common complications.

Whether you need to close your business because you are retiring, or want to wind up your company due to mounting debts, there will be an appropriate company insolvency option. It is worth bearing in mind that it is possible to close a company without leaving a permanent stain on your reputation. Liquidation should always be the last resort as it involves the sale of company assets in order to settle debts and finally close the business.

The biggest mistake company directors often make is going directly to an Insolvency Practitioner, and not seeking commercial advice, before putting the company into voluntary liquidation. An Insolvency Practitioner is appointed by the Secretary of State and duty bound to act on behalf of the Creditors. As a result, they are not allowed to commercially represent you throughout the voluntary liquidation due to a conflict of interests. It is also worth remembering the Insolvency Practitioner will have to make a report on you before processing the voluntary liquidation surrounding your management of the company affairs.

Liquidation comes in two forms:

Voluntary liquidation (creditor’s voluntary liquidation) is brought about by the company itself and administered by a qualified Insolvency Practitioner.

Compulsory liquidation is brought about by an order of the Court and can be conducted by the Official Receiver or an Insolvency Practitioner.

Compulsory liquidation is more damaging to the company and directors and should be avoided at all cost. However, completing the process properly will limit the damage and protect your interests, allowing liquidation to clear all outstanding debts and you to move on.

Company Rescue and Liquidations

There are two ways in which your business can be insolvent:
1. If you are unable to pay your debts.
2. If your liabilities exceed your assets.

In the first instance your company is said to be ‘cash flow insolvent’, and in the latter to be ‘balance sheet insolvent’.  There are a number of options open for either type of insolvency.  If an insolvent company continues to trade, the directors may end up personally liable for any losses made by the company during that period.  If the company later enters formal insolvency the directors may be disqualified from acting in this capacity for up to 15 years.

The Options

There are various strategies of rescue and recovery on behalf of companies, partnerships and individuals who are worried about the longevity of their business. The temptation to ignore or deny an obvious problem is easy to understand but not every situation will be forced into liquidation or to seek formal agreements.  By obtaining specialist help quickly, a company or business willing to adapt and/or enter into informal agreements with its creditors can, with the right help, be turned around.

Compulsory Liquidation

If your company is unable to pay its debts, has little in the way of assets, or is no longer viable, the court can liquidate your company with the Official Receiver appointed as liquidator.  The company must be registered in England or Wales to qualify for this.

Creditors Voluntary Liquidation (CVL’s)

A CVL is the most common way used to close an insolvent company, with the directors voluntarily liquidating the company and selling the assets or remaining business.
A CVL allows the company to be closed in a managed way, avoiding the stress and risk usually associated with compulsory liquidation. The cost varies upon the number of creditors involved, staff numbers, and assets etc., but generally the cost ranges between £3,500-£5,000, plus VAT and disbursements.
Every formal CVL process must be conducted by a licensed practitioner and involves strict regulations.

Company Voluntary Arrangement (CVA’s)

This is an alternative to liquidation and allows the company to continue operating for a specified period of time in order to maximise the return to creditors.
A CVA may only take place when a company is still viable.  You may agree to pay a percentage in full as your final settlement, or negotiate some time to collect the funds in order to pay. Once this agreement is in place, no further interest accrues on your debts and you are protected from any legal action. The directors remain in control of the company and once the CVA is completed the company continues to trade.

Members Voluntary Liquidation (MVL)

In an MVL all creditors are paid in full and the surplus is paid back to the shareholders.  It obtains the benefit of much lower tax rates on the capital you extract from your company. Capital returned to shareholders in liquidation is taxed much more lightly than dividends.
The various types of company closure as shown above demonstrate the complications of dissolving a company. Choosing the right method of closure is crucial to protect your business and your assets, as well as putting some damage limitation in place. The expert advice of a company dissolution specialist is highly recommended to ensure compliance with regulations and legalities and support you through the process.