We sincerely hope that every business you invest in through Seedrs is a success, but it is inevitable that some businesses will fail and enter administration or liquidation (also referred to as “winding up”). To help you to understand what may happen, here’s an overview of how businesses may wind up under the law of England and Wales. Broadly speaking, administration allows a struggling company to attempt to rescue the business or sort out the best outcome for creditors while still trading. In contrast, strike off and liquidation are used when a company ceases to trade, its assets are sold, and it is formally dissolved.
Please keep in mind Seedrs does not provide legal, financial or tax advice of any kind and you should consult with a professional advisor if you have questions about how a winding up may affect your investments.
Priority of Claims
It is important to note that you are unlikely to receive a distribution on your investment once one of the liquidation processes described below has started unless the company is solvent and can repay all its creditors. This is because there is a set priority of claims and shareholders are the bottom of the list. Generally, distributions on a liquidation are paid in the following order of priority:
1. To pay for the costs of the liquidation, including fees owed to the Insolvency Practitioner if needed;
2. Repayment to out of pocket creditors; and then
3. Shareholders including Seedrs investors.
What happens. If a company cannot pay its debts (also referred to as being “insolvent”) and is facing demands for repayment from its creditors, it may enter administration. This provides the company with some “breathing space” to continue trading and restructure its affairs while being protected against creditor legal claims. An Insolvency Practitioner is appointed (known as the “administrator”) with wide powers to manage the company’s decisions, business and property, and acts in the best interests of the company’s creditors.
Within eight weeks of being appointed the administrator will issue an initial statement of proposal for how the administration will be carried out. The administrator will first attempt to rescue the company so it can continue as a going concern. But if rescue is not possible, the administrator will attempt to achieve a better result for the company’s creditors than if the company were put directly into liquidation. Given the early-stage nature of Seedrs’ portfolio companies, it is unlikely that a business will be rescued because there is little interest in purchasing early-stage companies, and it is usually in the best interests of creditors to just sell the remaining assets. In our experience, more commonly the company continues to trade for a short amount of time, then goes into liquidation.
How long will it take. The length of administration can vary depending on the particular circumstances of the company. Initially administration is meant to last one year, however this can be extended if agreed between creditors or if ordered by a court.
Updates. Once the administrator agrees with creditors on a plan to proceed, he or she will issue progress reports every six months and a final report at the end of the administration. Seedrs will pass these reports on to you via the business’s page on the Seedrs website. For more details on updates see the “Updates”section below.
What happens. No matter how a business is wound up, the company will eventually need to be stricken off the companies register maintained by Companies House. When the business affairs of a company are relatively straightforward, it can be dissolved using this “strike off” process alone.
First, the company stops operating and its assets are distributed to creditors and shareholders. Then, a majority of directors sign a DS01 form requesting strike off, and file it with Companies House. Companies house publishes a notice in the Gazette, called a GAZ1, noting the company will be struck off in two months unless it receives objections. Finally, if there are no objections after that time, Companies House will publish a second Gazette notice, called a GAZ2, confirming dissolution and striking the company off the Companies House register.
Unlike other types of wind ups, strike off does not involve an Insolvency Practitioner and therefore is significantly simpler and cheaper than the other winding up methods described below.
How long will it take. Once the company has distributed all its assets, the strike off process generally takes around three months.
Updates. The forms and notices outlined above (DS01, GAZ1, and GAZ2) are all published on the company’s public filings page at Companies House. Seedrs monitors for these filings and will notify you on the Business Page when it sees they are published. For more details on updates see the “Updates” section below.
Returns. The business may have funds available to distribute to Seedrs investors. For details on how funds are returned to you, see the “Distributions” section below.
Members Voluntary Liquidation (MVL)
What happens. A MVL (also known as a “solvent liquidation”) is when the directors or shareholders of a solvent company decide to stop trading and wind up the business. The process is managed by an Insolvency Practitioner who reports to the directors and shareholders.
To initiate the MVL the directors of the company first sign a statutory declaration saying that the business is solvent and there is enough money to pay back all creditors. Then, within five weeks, shareholders must pass a special resolution agreeing to wind up the company, which usually requires approval by 75% or more of shareholders. Seedrs will participate in the vote , and will act in your best interests by trying to maximise any potential shareholder distributions, even though the chances of distributions are low.
Once the special resolution is passed, an Insolvency Practitioner is appointed to liquidate the company, and any distributions will be paid in the order of priority.
At the end of the MVL the company will be dissolved and is struck off the Companies House register according to the Strike Off process described above.
If the Insolvency Practitioner decides that the company will be unable to pay its debts together with all interest within 12 months, the MVL will be converted to a Creditor’s Voluntary Liquidation, which is explained below.
How long will it take. The length of an MVL can vary widely, but in our experience it usually takes 6 to 18 months to complete.
Updates. The Insolvency Practitioner is required to report back to shareholders on an annual basis. Seedrs will pass on these updates to you via the Business Page. For more details on updates see the “Updates” section below.
Returns. In some circumstances, there may be a return made to you if there are funds left over after all creditors have been paid back in full. For details on how we distribute funds to investors, if applicable, see the “Distributions” section below.
Creditors Voluntary Liquidation (CVL)
What happens. A company may choose to enter CVL when it is unable to pay all its debts. The process is managed by an Insolvency Practitioner and requires the involvement of the company’s creditors.
A company goes into CVL if its shareholders pass a special resolution, with a majority of at least 75%, to wind it up. Seedrs will be involved in such a shareholder vote, but unlike a MVL, there is no chance that Seedrs investors will receive a return so we will usually support the liquidation.
If the special resolution is passed, the directors send a statement of affairs to creditors documenting the company’s assets and liabilities, as well as details about the hierarchy of creditor’s claims, among other things. If the creditors approve this document, an Insolvency Practitioner is appointed to collect, sell and distribute the proceeds of the company’s assets in the order of priority.
After the initial shareholder vote, Seedrs role in the CVL is very limited because control of the process is taken by creditors. Following collection and distribution of the assets, the company will be dissolved and stricken off the Companies House register according to the Strike Off process described above.
How long will it take. The length of a CVL can vary widely, in our experience a CVL can take 6 to 18 months to complete.
Updates. The Insolvency Practitioner is required to report back to creditors but not to shareholders. He or she will produce a progress report on an annual basis. Seedrs will monitor Companies House filings for when the reports are published to keep you updated on the Business Page, and may attempt to receive additional updates from the Insolvency Practitioner if necessary. For more details on updates see the “Updates” section below.
Returns. You will not receive any distribution from a CVL because the company is unable to repay its creditors in full.
What happens. A Compulsory Liquidation is liquidation ordered by a court to settle a dispute and could happen when there is a falling out between founders, when insufficient tax has been paid to HMRC, or simply when the company has not repaid its creditors. This type of liquidation is costly and is time consuming. It is the final and most serious action an unpaid creditor can take against the company, and it is extremely rare a Seedrs portfolio business will undergo compulsory liquidation.
The process typically begins when a creditor files a petition in court saying they are owed more than £750 and have waited more than 21 days to be paid. If a majority of creditors support the petition and the court agrees the company should be liquidated to settle the dispute, it issues a wind up order and appoints an “Official Receiver”. The Official Receiver takes control of the company from the directors, investigates whether the directors acted inappropriately, and liquidates the company’s assets to repay aggrieved parties and other creditors. Sometimes the Official Receiver is replaced by an Insolvency Practitioner at the request of creditors.
Following distribution of the company’s assets, the company will be dissolved and its name struck off the Companies House register according to the Strike Off process described above.
How long will it take. Due to the disputes involved, and the nature of court proceedings in compulsory liquidation, this process can be lengthy. The time it takes can depend on a number of factors that will be different in each case.
Updates. The Official Receiver is required to give annual updates on the progress of the liquidation, which Seedrs will pass on to investors via the Business Page. For more details on updates see the “Updates”section below.
Returns. Returns will depend on the type of dispute at issue during a compulsory liquidation.
Seedrs’s role during wind ups
As your nominee, our obligation to you is to act in your best interests when a company decides to wind up. Given that winding up processes prioritises the rights of creditors over shareholders, typically the wind up happens with limited involvement on the part of Seedrs. That said, we will monitor the progress of the wind up process and keep you updated about developments as we become aware of them through updates from the company, the Insolvency Practitioner if one is involved, and Companies House filings. For more details on updates, see below.
When a company decides to wind up, we encourage it to keep you up to date with its progress. Normally a company will update the Business Page to explain why it is winding up, and if they do not, we request them to do so and include details on:
- what has happened leading to the decision to wind up,
- which insolvency process will be used,
- if there will be an asset sale, and
- whether you should expect to receive any distributions from the winding up.
Seedrs will monitor the wind up process, will keep you updated on developments, and inform you of the outcome. However, Insolvency Practitioners are only required to provide limited updates to shareholders, and while sometimes they may give additional information to Seedrs, often we can only rely on the reports they are required to do by law. Other than these reports, you should not expect to receive more frequent updates on how the administration is proceeding unless the business or the Insolvency Practitioner voluntarily provides them. There may be occasions when we request updates and do not receive them, which we will also inform you about.
When a company is going through strike off or liquidation, Seedrs will ask the business or Insolvency Practitioner whether there is likely to be any distributions to investors, and if so, how much any distribution will be. As explained above, whether there is a distribution or not, and when it happens, will depend on whether the company has money left over and the insolvency process used.
If a distribution can be confirmed, Seedrs will email you detailing the date the distribution will be and the amount to be distributed per share. When the distribution payment is made you will receive a notification by email. It is important to note that you may not be able to claim the tax reliefs outlined below until these distributions are calculated and paid. If the company distributes a return, the funds are treated as a capital gain so you may need to pay capital gains tax.
SEIS/EIS Tax Reliefs
If your investment was SEIS or EIS eligible, you may want to take advantage of any potential tax relief when a company fails. Various levels of tax relief are available depending on your financial circumstances, and you should seek help from a financial advisor if you are unsure how the tax rules apply to you.
We will endeavour to notify you of relevant information about the tax reliefs available to you on the Business Page, but please remember that it is your responsibility to handle your tax relief claims.
Reliefs already used: A wind up will not affect your income and capital gains tax relief under the Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS), unless there is impropriety by the invested business.
Loss relief: If your investment was EIS or SEIS eligible, you can claim loss relief if the business enters liquidation. Loss relief allows you to claim back your losses against your income tax or capital gains tax bill in the year of disposal or the previous year. For more information on loss relief, see the Seedrs guides to EIS and SEIS, or our blog post on investment losses and tax relief.
Negligible value claim: Sometimes the wind up process can take a long time, and you may choose not to wait until the process is complete before claiming loss relief. Instead, you can make a negligible value claim to HMRC after Seedrs has written down the value of your shares to zero. HMRC will treat your shares as being disposed of, then immediately reacquired, giving you an accrued loss for tax purposes. For more information on negligible value claims, see the HMRC guidance.