The Last Resort: Knowing When to Liquidate Your Struggling Business
Deciding to put your company into liquidation can be a difficult decision, but it is sometimes necessary to ensure the best outcome for your business and its stakeholders. In Ireland, there are various options available to companies facing financial difficulty, and understanding the liquidation process can help you make an informed decision.
The Liquidation Process
Liquidation is the process of closing a company by converting its assets into cash and distributing the proceeds to its creditors. This can be done voluntarily by the company or by court order, depending on the circumstances. In Ireland, there are three types of liquidation: voluntary liquidation, compulsory liquidation, and court-ordered liquidation.
Voluntary liquidation is initiated by the company's directors and can be either a members' voluntary liquidation or a creditors' voluntary liquidation. A members' voluntary liquidation is appropriate if the company is solvent and the directors believe that the company has achieved its purpose or is no longer needed. A creditors' voluntary liquidation is appropriate if the company is insolvent and cannot pay its debts as they fall due.
Compulsory liquidation is initiated by a court order and is typically brought by a creditor or a group of creditors. This is usually a last resort for creditors who are owed money by the company and have exhausted all other options for debt recovery.
Court-ordered liquidation can be initiated by the court if it believes that the company is unable to pay its debts as they fall due, or if the court considers it just and equitable to wind up the company. This type of liquidation can also be initiated by the Corporate Enforcement Agency (CEA) if it suspects that the company has engaged in wrongful trading or other illegal activities.
Signs You May Need to Liquidate Your Business
So, when should you consider putting your company into liquidation? Here are some signs that your company may be facing financial difficulty and may need to be liquidated:
Insufficient cash flow to pay debts as they fall due
One of the most common reasons companies may consider liquidation is due to an inability to pay their debts as they fall due. If you find that your company is consistently struggling to make payments to creditors or suppliers, this may be an indication that liquidation is necessary.
Failure to secure funding or investment to support the business
If your company is struggling to secure funding or investment to support the business, it may be a sign that the company is not financially viable. In this situation, liquidation may be the best option.
Difficulty in generating revenue or profitability
If your company is not generating enough revenue or is consistently unprofitable, it may be a sign that the company is no longer financially sustainable. In this situation, liquidation may be necessary to prevent further financial losses.
High levels of debt that cannot be repaid
If your company has accumulated high levels of debt that cannot be repaid, it may be necessary to consider liquidation. This can occur if the company has taken on too much debt, has not managed its finances properly, or has experienced a sudden loss of income.
Legal action or threats of legal action by creditors
If your company is facing legal action or threats of legal action by creditors, it may be a sign that the company is insolvent. In this situation, liquidation may be the best option to protect the company's assets and ensure that creditors are paid in accordance with the law.
You’re personally earning less than your employees
Although business owners should expect to reinvest profits back into the business and forgo higher salaries for long term gains, earning less than employees can indicate that the company is struggling to generate revenue. If a business owner is unable to take a market rate salary, it may be a sign that the company is not profitable or is experiencing financial difficulties.
Funding the business from personal savings
It’s common for business owners to use personal funds to finance the startup of a new business, however, relying on personal savings to sustain a business can be a sign of financial distress. If the business is not generating enough revenue to cover its expenses and the owner is continually injecting personal funds, this may indicate a lack of profitability or unsustainable cash flow. If the financial situation cannot be improved, it may be necessary to consider liquidation to wind up the business and settle any outstanding debts.
You’re considering re-mortgaging your family home
While it is understandable for business owners to seek financing for their business in any way possible, relying on a family home as collateral for business debt is a high-risk strategy. If the business is not generating enough revenue to cover its expenses and the owner is continually borrowing against their family home, this may indicate a lack of profitability or unsustainable cash flow. If the financial situation cannot be improved, it may be necessary to consider liquidation as a way to wind up the business and settle any outstanding debts. The re-mortgaging of the family home can also put the owner's personal assets at risk, including their home and savings, which is another reason to consider liquidation.
You’re perpetually using 100% of an overdraft facility
Overdraft facilities are designed to be used as short-term financing options, and while they can provide businesses with flexibility in their cash flow, relying on them too heavily can be a sign of financial distress. If a company is consistently using its entire overdraft facility and unable to pay it down, it may indicate a lack of profitability or unsustainable cash flow.
The bank wants to convert your overdraft to a loan
If the bank wants to convert an overdraft facility to a loan, it can be a sign that a company may be heading towards liquidation. Overdraft facilities are designed to be used as short-term financing options, while loans are generally long-term commitments. If a company is unable to repay its overdraft facility and the bank is requesting to convert it to a loan, it may indicate that the bank perceives the company as high risk and is trying to reduce its exposure. The bank's request can also indicate that the company is experiencing financial difficulties and may be unable to meet its short-term cash flow requirements.
The sheriff has visited you or the business premises
The sheriff is a court officer who has the power to seize assets and enforce court judgments. The sheriff has the power to collect taxes on behalf of Revenue in Ireland. The sheriff's office is responsible for enforcing the collection of unpaid taxes and can be tasked with collecting unpaid taxes from businesses and individuals. The sheriff may seize assets, such as money, goods, or property, to satisfy unpaid taxes, and may also enforce a judgment or court order to sell the seized assets to repay the tax debt. The sheriff will typically send a demand letter to the debtor before taking any action to collect unpaid taxes, giving the debtor an opportunity to pay the tax debt in full. If the tax debt remains unpaid, the sheriff may be instructed to enforce the collection of the debt. It is important to note that the sheriff can only enforce the collection of taxes that are legally owed and that have been properly assessed by Revenue. The presence of the sheriff can be distressing, and it is a strong indication that your company's financial situation has reached a critical point.
If you are experiencing any of these signs, it is important to seek professional advice from a licensed insolvency practitioner or a qualified accountant. They can help you assess the viability of your business and provide guidance on the best course of action.
In some cases, there may be alternatives to liquidation that can help your company avoid closure. These may include restructuring the company's debts, negotiating with creditors to extend payment terms, or seeking investment or funding.
If you're considering liquidation and wish to schedule a private, obligation-free conversation with an insolvency expert, please click the link below: