Michael Reid: Key questions and insights on liquidation for directors

Michael Reid: Key questions and insights on liquidation for directors

Michael Reid

Continuing from last week’s blog, Michael Reid, a licensed insolvency practitioner and managing partner of accountancy firm MHA, discusses common questions faced by directors seeking advice, addressing topics such as buying company assets during liquidation, the court-driven nature of the process, the timeframe for liquidation, costs involved, public awareness, and the loss of control over the company once a liquidator is appointed.

Last week’s article dealt with several questions that are asked regularly when worried directors ask the MHA insolvency team for advice.

It is a fact of life that not every business will flourish and provide a good living for all those involved. Changes in legislation, competitor activity, poor management/leadership and cash flow difficulties are some of the reasons why directors seek independent advice regarding their company’s ongoing financial viability.

Frequently, a director has tried to find answers online or by asking friends, which perhaps explains why many urban myths develop about the liquidation process and how it might affect the company/director. This article reviews more of the questions that are frequently asked.

Can I buy the company’s assets when liquidation incepts?

Yes. The key issue is for the liquidator to identify all assets (owned and financed) and ensure that fair value is obtained. This tends to be achieved by instructing an independent valuation from an industry expert, e.g. not relying upon a director’s estimate. The liquidator will sell to the highest bidder if that person can provide proof of funding. When the liquidator issues his report to creditors, transparency requires full disclosure of the asset realisation process.

Is liquidation a court process and will I have to appear in court?

The process tends to be court-driven when a creditor is seeking to liquidate a company. Currently, the most popular method of entering liquidation when the directors elect to start the process is known as a creditor’s voluntary liquidation. This process still involves the board, shareholders and all creditors but avoids the need to present a petition in court. In both cases, the directors do not appear in court.

How quickly can liquidation start?

The normal timeframe for a creditor’s voluntary liquidation is 8 to 10 days. If a floating charge has been granted to a lender, the process might take an extra 3 or 4 days. The quickest method of passing control to a liquidator is by asking the relevant court to appoint a provisional liquidator: this can be achieved within days if correct planning is in place. A provisional liquidator nay be required if, for example, there are perishable goods that require immediate attention, assets need to be recovered and physically safeguarded, or there is ongoing trading that the company cannot support in its current financial condition.

Do I have to pay for the costs of the liquidation process?

Not unless specific circumstances apply. The normal method of the liquidation costs being settled is from whatever assets (book debts, equipment, machinery, vehicles etc.) the liquidator can sell. The liquidator’s fees and costs are the first to be paid from whatever is realised. Indeed, if there are no assets of great value, a director may struggle to find someone willing to act as liquidator of a Scottish registered company.

Is there a public advert in the local newspaper so that everyone will know?

Every liquidation is recorded at Companies House and in the Register of Insolvencies (maintained by the state and accessed free of charge via www.aib.gov.uk). The law does not insist on a public advert in a local newspaper, but a liquidator will sometimes advertise locally if he is meeting resistance from a director about providing accounting information, or if such information cannot be located/retrieved. A public advert helps the liquidator to ensure that they have undertaken all reasonable means to identify and contact company creditors.

Will the liquidator close the company immediately?

It depends upon the circumstances. It may be that work requires to be completed in order to ensure payment of a book debt, or trading should continue in order to improve the prospects of a sale, e.g. a public house or café. In general terms, however, one would expect the liquidator to be risk averse and clearly, if the director could not trade profitably why would the liquidator be able to do better? Therefore, the working assumption is that closure will occur when the liquidator is appointed, or very soon thereafter.

Will I lose control over the company?

Yes. Once appointed, the liquidator is in full control and their decision is final on all aspects of the process.

Michael Reid is partner at accounting firm MHA

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