According to a survey carried out by Opinium on behalf of Be The Business recently, two out of five small businesses have already temporarily closed their doors and one can only speculate on how many might have to shut for good in the coming weeks and months.
We are living and working in unprecedented times and businesses of all sizes are being hit hard by the spread of coronavirus. The chancellor has announced some emergency packages, including changes to insolvency measures, in a bid to help keep the economy going, but some might argue that he has simply not gone far enough and fast enough to get the financial support out to those businesses in need. It is inevitable that some businesses will not survive the turmoil and will go out of business.
>See then: How to get the government’s £10,000 cash grant for small businesses
How to wind up your small business
As an owner, you need to take control of your situation as seek professional help as soon as possible if you want to wind up your small business. A licensed insolvency practitioner will be able to advise you on what is your best option for dealing with your company’s debts.
What is a Creditors’ Voluntary Liquidation?
For most insolvent companies the wind up of a small business involves a process called a Creditors’ Voluntary Liquidation (CVL). Liquidating your company voluntarily via a CVL – as opposed to being forced into compulsory liquidation – will go some way to protecting your business reputation in the future.
How does a CVL work?
A company director can propose a CVL if their company cannot pay its debts, i.e. it is insolvent, and the shareholders agree and pass a “winding-up resolution”. This means that a licensed insolvency practitioner takes control of the company assets with the intention of either repaying creditors or distributing the money realised to shareholders. Business owners need to understand that a CVL is not a compulsory liquidation, which occurs when a creditor attempts to force a company out of business in order to recover any debts owed to them.
Once a company does embark on a CVL it will stop trading and be wound up. A CVL is a formal recognition of your duties as a director to any of the company’s creditors.
>See also: How do I apply for a Coronavirus Business Interruption Loan?
What is the winding-up process?
Before liquidation proceedings can start, a company needs to have stopped trading and provided the insolvency practitioner conducting the process with the following:
- Two forms of identification for each director and all shareholders who hold 25 per cent or more shares in the company
- Completed history and information gathering questionnaire and completed pension questionnaire
- A full list of creditors, including name, address and amount outstanding
- A full list of employees who have been made redundant
- Copies of the last three years accounts, if applicable.
The insolvency practitioner will prepare all the documentation that is required for the CVL process to wind up a small business and will liaise with any required external parties such as The Royal Institution of Chartered Surveyors (RICS), valuers for valuing any company assets. Dependant on the company’s articles of association, a company could be placed into liquidation within approximately 7-14 days.
You need to hold two company meetings
At the board meeting, the company directors formally agree that the company is insolvent and cannot continue to trade. At this meeting, the directors would also agree to appoint their chosen insolvency practitioner as the liquidator of the company, as well as agreeing for the necessary meeting of members to be summoned.
The board meeting is generally held at the director’s home or office and it is not essential for the insolvency practitioner to attend.
The members’ meeting is normally held approximately 14 days after the board meeting and can be convened at short notice, should the statutory percentage of members agree to this. This meeting would usually be held at the insolvency practitioner’s offices and the company directors must attend. Before the meeting, which normally lasts 15 minutes, can take place, the company’s books and records should be provided. With that meeting done, the company is now in formal voluntary liquidation.
You need to ratify the liquidator appointment
Once the members’ meeting has been held, the creditors still have to ratify the appointment of the liquidator. Under the new insolvency rules that came into effect in April 2017, there is no longer a requirement to hold a physical meeting of creditors to ratify the appointment of the liquidator. The appointment can now be deemed as accepted, unless sufficient creditors object to this. This is the “deemed consent procedure”. Alternatively, a “virtual meeting of creditors” can be held where the creditors attend by conference call rather than in person.
The insolvency practitioner will keep a register of any objections. As soon as 10 per cent of creditors who would be entitled to vote at a meeting object, then the deemed consent process automatically terminates, and a physical meeting needs to take place.
What is the 10/10/10 threshold?
It is also possible for creditors to requisition a physical meeting, but in order for one to be summoned it must be explicitly requested by either:
- 10 per cent of the total creditors (by value); or
- 10 per cent of the total number of creditors; or
- 10 individual creditors
This is known as the “10/10/10 threshold”.
Once this “10/10/10 threshold” has been met, or if enough objections to the deemed consent procedure are received, a physical meeting will be convened within three days and the directors notified that they will be required to attend the meeting. While every effort will be made to ensure that it is held on the same day as the members’ meeting – for everyone’s convenience – that will not be possible if the request for a meeting or objections are received after the time of the members’ meeting. It is to reduce the chances of that happening that the member’s meeting is usually held in the late afternoon, since creditors can object at any time up until 23.59 hours that day.
Since the new insolvency rules were introduced, it is very rare that a creditors’ meeting is explicitly requested, although there are occasionally objections raised to the deemed consent procedure.
You still need to pay the taxman
When a company gets into cashflow difficulties, some directors (wrongly) choose not to pay the taxes that are due to HMRC – e.g. corporation tax, PAYE, VAT and national insurance contributions. The company does, however, continue to pay other parties (such as their suppliers). These payments may be “preferential” payments but are certainly to the detriment of HMRC. In the event of insolvency, this could lead to a director’s disqualification. In fact, this is one of the most common reasons for considering whether someone is unfit to be a director. Under the rules of the Company Director Disqualification Act 1986 (CDDA), a director can be disqualified for between two and 15 years.
An insolvency firm will look into this and other matters relating to the conduct of the directors and the affairs of the company and are required by law to submit information to The Insolvency Service about the conduct of all those who have been directors, or shadow directors, of the company within the three years prior to liquidation. This must happen within three months from the date of liquidation.
Don’t let things get out of control
The coronavirus is causing havoc for small businesses and taking the decision to wind up your small business before matters get out of control is the best option. With proper advice and support it needn’t be such a daunting prospect to wind up your small business and will help you to come to terms with the situation and move on.
John Bell is director of insolvency firm Clarke Bell, which he founded in 1994
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