Almost nine in ten startups fail. When a business fails, that business needs to wind up its affairs fast and allow its creditors to move on. This involves business liquidation, in which the company dissolves and its assets get sold on.

While a business can persist until dissolved by necessity, it can also elect to undergo creditors’ voluntary liquidation. While this terminates the business, it does so before things get worse.

If your business has started to falter, you don’t have to keep struggling. While a company liquidation won’t work for every bad business situation, we’ll go over how it works so you can make the right call.

How Does Creditors’ Voluntary Liquidation Start?

When a company’s board of directors concludes that the company has no path to profit, the board can initiate a liquidation to stop the bleeding. It usually uses two tests to arrive at this conclusion.

Cash Flow Test

The cash flow test looks at due dates for the company’s bills. If a company cannot afford to pay its bills when they come due because of insufficient cash in hand, it fails the cash flow test.

Balance Sheet Test

The balance sheet test looks at a company’s overall liabilities. If the company’s liabilities outstrip its assets, it will come out to be balance sheet insolvent.

Does Failing These Tests Always Matter?

At times in a company’s life cycle, it may have cash flow problems or larger liabilities than assets. These tests don’t always tell the full picture.

Sometimes you have a great foundation but no liquid assets. Sometimes you have good cash flow but a lot of debt. These don’t always indicate a business has started falling apart.

Failing both of them will usually indicate a business has unsolvable problems, though. If you can’t meet your existing obligations and have more debt than you can manage, taking on more debt won’t fix it.

How Does It Proceed?

The board of directors partners with a licensed Insolvency Practitioner to oversee the process. Every business goes through the same four steps toward business liquidation. If you need more detailed information, you can learn more about the process from insolvency practitioners.

Directors’ Meeting

At this stage, the board of directors meets and resolves to convene a shareholders’ meeting and announce the liquidation. An Insolvency Practitioner drafts all necessary text.

Notice to Shareholders and Creditors

At this stage, shareholders receive notice of a general meeting and all interested parties receive information on the company liquidation. Creditors receive a report on the company’s finances. They must be notified at least 24 hours in advance of both a general shareholders’ meeting and the official Decision Date for liquidation.

Decision Date

On the Decision Date, at least 75% of shareholders must agree to start the liquidation process before it can begin. Creditors can request a physical creditors’ meeting, but laws no longer require this.

Liquidation

When the time comes to liquidate the company, UK law dictates the order in which creditors get paid. Secured creditors with a fixed charge receive the first bite at the apple, followed by staff and preferential creditors. Secured creditors with a floating charge come next in line, with unsecured creditors getting the remainder.

Landing Gracefully From a Fall

While the decision to undergo creditors’ voluntary liquidation can feel difficult, by the time it comes to pass, you’ll know you’re doing the right thing for your business. Not liquidating when it feels right can leave you with more liabilities in the long run.

Did you conclude liquidation wasn’t the right call for you? Try taking a look at our business section for more articles that can inform your next move.