Pretty much everyone in business has at least heard of someone going "bust". That means that they are insolvent, and more likley than not that they've gone into Liquidation

For a Creditors Voluntary Liquidation to be appropriate, the company must be insolvent and that is proved by two tests:

The Balance Sheet test - As the name suggests, this is looking at the overall asset and liability position. It's a bit more indepth than just looking at a Balance Sheet, we move away from the "book values" that are recorded in the company's account and move to "estimated realisation values", so essentially what they would likely sell for rather than accounting values. If there liabilities are higher than the company's assets, the company is balance sheet insolvent.

The cashflow test - Arguable the most vital test for any business, this tests whether the company can pay it's debts as they fall due. Simply put, if an invoice is due for payment and you cannot pay it you are likely to be cashflow insolvent.

If your company is cashflow insolvent, it is vital that you take advice early. As directors of a company, your duties change once you are in an insolvent position and the focus shifts to creditors and their treatment, rather than shareholders. If you have a strong business but are experiencing temporary cashflow insolvency but expect to return to a solvent position, then there are better alternatives to a liquidation. In those cases, you may well be able to come to an agreement with your company's creditors without having to use any formal insolvency process.

In any case, I (or the majority of other Insolvency Practitioners) will review your company's position and give advice for free, so there should not be a barrier to discussing your situation.

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If you know that the company is insolvent, you should take active steps to deal with the matter. A Creditors Voluntary Liquidation could be one of those potential steps, depending on the specific circumstances.

Dealing with company debt and creditor pressure is stressful. By liquidating an insolvent company you essentially draw a line under it. You no longer control the company, the Liquidator is responsible for the winding up and will deal with creditors from that point onwards.

If the underlying business, or parts of the business, is successful but burdened by historic debt. That profitable parts of the business may be able to salvaged and sold, either to you or a third party. Depending on the business, an Administration may be more appropriate.

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The short answer is yes, you are still allowed to be a director. There is nothing stopping you from either starting a new limited company or continuing to act as a director in an existing limited company.

As part of the Liquidation, the Liquidator is required to submit a report to the Secretary of State on the conduct of directors. If there is evidence of wrongdoing, they may seek to disqualify a director a period of time between 2 and 15 years. They can do so by either agreement or court order.

There are also restrictions on re-using the company name, explained more here, and there are other restrictions such as bankruptcy that may mean you are not able to act as a director.

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Generally speaking a director will not be responsible for the debts of a company that enters Liquidation.

There are exceptions to that though, and the most common are as follows:

• Personal Guarantees - These can be given to almost any creditor but are more likely to exist with lenders or landlords. In entering these agreements, you have promised to pay (sometimes up to a cap) for anything owing by the company should it fail to make its repayments.
• Re-using the name of a company that you have previously liquidated, without using a valid exception. In that case, you are personally jointly and severably liable for the new company's debts, as well as committing a criminal offence.
• Wrongful trading and misfeasance – There is further information on this here, but there are circumstances where wrongdoing as occcured and the liquidator may need to take action against you to restore the position to where it should have been, had the wrongdoing not occured.
• There are niche circumstances where HMRC could seek to make you personally liable for some of the tax debts.
• Compensation Order – Applied for by the Secretary of State in the event that you are disqualified as a director.

Whilst these do not affect the decision of placing the company into liquidation, it could affect your personal finances and you should seek further advice on those.

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In the lead up to liquidation, the Company will need to cease trading and make it's workforce redundant.

The Redundancy Payments Service ("The RPS"), a Government Department in the Insolvency Service, make statutory payments owed to employee's on behalf of the company, and then sit as a creditor in the Liquidation. The payments are capped to the statutory limit of £643 per week (this usually changes every April), and is paid on the following:

• Wage Arrears - The RPS will pay up to 8 weeks of unpaid wage arrears.
• Holiday Pay - Up to 6 weeks of unpaid holiday can be claimed from the RPS. To work out the amount holiday owed, you need to pro rata the annual allowance to the date of redundancy, and deduct any holidays already taken.
• Redundancy Pay - Any employee that has worked for the company for more than two years is entitled to claim redudancy. The payment is calculated on the 12-week average weekly pay, multiplied be the redundancy weeks the employee is entitled to. The redundancy weeks depends on how many years service the employee has, and their age.
• Compensation for loss of notice - The RPS will only cover statutory notice pay, rather than contractual, which is one week for every year worked, up to a maximum of 12 weeks.

If an employee is paid more than the statury cap of £643.00, has a longer notice period than the statutory notice or is owed any other money (such as expenses) that are not covered by the RPS, then they will have a claim in the liquidation.

Directors may be entitled to claim from the RPS if they were properly employed by the company. Click here for further details on that.

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There are different classes of creditors in a liquidation; secured creditors, preferential creditors and unsecured non-preferential creditors. Once the company's assets are realised and the costs of the liquidation settled, any money left available will flow down the ranks of creditors, being split equally between creditors of the class according to the amounts owed. At the end of the liquidaiton, creditors will be advised that no further dividends are possible, and will write off any balance that remains outstanding.

In most circumstances, a bank is likely to be a secured creditor. They will lend the company money on the back of that security and it will most likely by fixed and floating charges. The fixed charge sits at the highest priority, as it is "fixed" against specific assets or categories of assets. For a Liquidator to deal with these fixed assets, they need to obtain permission from the secured creditors.

The floating charge works slightly different, and (in most cases) covers all assets that are not fixed, such as cash at bank, stock, debtors, etc. Floating Charge creditors sit below the Preferential Creditors but above non-preferential.

Preferential creditors are mainly made up of employee claims for wage arrears and holiday pay, and HMRC claims for certain taxes. In vast majority of cases, HMRC are owed a substantial amount in respect of VAT, which ranks as a secondary preferential claim, just behind employee claims. This usually leads to there being no further funds available to classes of creditors ranking below.

As mentioned above, Floating Charge Creditors are paid after preferential creditors. Their payments, if over £10,000 are reduced by something called the Prescribed Part, which is based on a percentage of the dividend and is saved for non-preferential unsecured creditors.

Finally, at the bottom of the ranks is the non-preferential unsecured class of creditors. In most cases, this is the largest pool of creditors by volume and will include suppliers, rent, utilities and all other creditors. This class of creditors often see no or minimal returns from a liquidation. Suppliers of stock may have Retention of Title, which may allow them to recover some of the goods supplied, if they are still held by the company.

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When you place your company into liquidation, the Liquidator has a statutory duty to investigate its affairs.

The level of investigations depend on the circumstances, but in all cases the Liquidator will look at bank statements, review the company's books and records, look at past accounts and ask creditors to voice their concerns over any misconduct. That investigation may uncover wrongdoing that requires further action.

If you plan on trading again after liquidation, most major contracts will ask if you have liquidated a company in the last 5 years, it may impact the costs of insurance in the future and available borrowing. You could also find that if you trade with the same suppliers, they may not extend you any credit facility.

In cases of serious breach of duty, you may find that the Sectretary of State will seek to ban you from being a director.

For further information on common issues, please click here to go to a page where I go into more detail.

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There are two different costs for a Creditors Voluntary Liquidation, the pre-appointment costs and, following liquidation, the Liquidator's Fees. Both normally depend on the size and complexity of the liquidation, and different Insolvency Practices will have different charge-out rates, affecting the overall costs.

The pre-appointment costs are usually agreed on a fixed fee. We offer to fix our fees at £2,000.00 plus VAT. That covers all the pre-appointment work required to place your company into liquidation and for Joe Whiley to take on the appointment as Liquidator.

The post-appointment fee can be fixed either by time cost, fixed fee, percentage of realisations or distributions, or a combination of those. It is important to stress that the Liquidator's fees are paid from realised company assets, directors are not personally liable for Liquidator's fees unless they enter into a personal gaurantee. There is no blanket approach to costs, it really does depend on the size and complexity of the matter. The more investigations and recovery action required, the higher the costs are likely to be. Creditors do get a say in the matter, as they either approve or deny proposed fees.

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