Liquidation is the process of closing a business and distributing its assets to creditors. This guide provides a straightforward overview for business owners.

We start by defining liquidation and its impact, explaining why a business might need to liquidate and the objectives it seeks to accomplish.

We then provide guidance on managing debt and how to properly wind up a company, including key steps and considerations in the liquidation process.

Finally, we specifically address the requirements for liquidating a limited company, focusing on the legal framework and the steps required.

At Company Debt, we offer expert guidance and financial advice to help your business, whether insolvent or solvent, through liquidation.

Company-Liquidation

What Does Liquidation Mean?

Liquidation refers to the process of closing a limited company by converting its assets into cash, repaying creditors in order of priority and then dissolving the company from the official register at Companies House.

Any money left goes to shareholders.

It can be a voluntary process for either a solvent or insolvent company, or compulsory, following a court order subsequent to a winding up petition.

How do I Liquidate my Limited Company?

To liquidate your limited company effectively, the process begins with the engagement of a licensed insolvency practitioner (IP), who is essential for guiding you through the steps required.

Liquidation starts with assessing your company’s financial position to determine the most suitable type of liquidation: if your company is solvent, a Members’ Voluntary Liquidation (MVL) might be the path, allowing for an orderly shutdown and tax benefits. If insolvent, a Creditors’ Voluntary Liquidation (CVL) is necessary, focusing on fair distribution to creditors.

The formal decision to liquidate is made by the company’s directors and is solidified during a board meeting. Following this, shareholder approval is necessary, achieved through passing a resolution to liquidate the company.

Once the IP is appointed, the direct involvement of the company’s directors in managing the business diminishes. Directors’ main responsibility shifts to supporting the IP by providing thorough and accurate details about the company’s financial affairs, assets, and liabilities.

What Happens if You Liquidate Your Company?

When you decide to liquidate your company, it essentially means you’re handing over control.

The IP will take over all creditor communications, deal with staff, suppliers, HMRC and all other formal aspects of closing the company. Assets will be sold to pay creditors, with any debts not covered formally written off with the dissolution of the company.

No matter the scenario, navigating through liquidation can feel daunting. That’s where we come in. At Company Debt, we specialize in guiding businesses through this process. We understand the intricacies involved and can offer the expertise needed to manage liquidation effectively.

3 Processes to Liquidate a Company you do not Want to run Anymore

There are two voluntary liquidation procedures and one compulsory liquidation procedure. All require the assistance of a liquidator (an appointed licensed insolvency practitioner).

Creditors’ Voluntary Liquidation (CVL)

A CVL is an official term for a voluntary liquidation process used to close down an insolvent company.

A CVL involves the dissolution of the insolvent company and the redistribution of any available assets to creditors. This procedure enables directors to write off unsecured business debts that are not personally guaranteed.

Compulsory Liquidation

Compulsory liquidations are usually initiated by a creditor looking to force a business into closure via a court order application (winding up order). Most commonly, this is HM Revenue & Customs (HMRC). However, it can be initiated by any creditor owed more than £750.00.

This procedure is often used to wind up your business as a last resort by creditors after failed negotiations over missed payments.

The conduct of the directors is reported back to the UK Secretary of State at the end of the liquidation proceedings, and failure to cooperate with the Official Receiver can have serious repercussions.

>>Read our full article on What Happens to Directors in Liquidation?

Members’ Voluntary Liquidation (MVL)

This procedure is the appropriate way to liquidate a solvent UK company and can also be used as part of an exit strategy. It can also be used by shareholders who wish to extract assets or cash in a tax-efficient way.

MVL’s allow you to pay less capital gains tax (at 10% on all qualifying assets)

Can My Company Continue to Trade Whilst in Liquidation?

No, your company cannot continue to trade while in liquidation. When the liquidation process starts, the company must stop all business operations.

This cessation of trading is necessary to ensure the fair and orderly dissolution of the company’s affairs.

Quick Quote for Closing a Company

Company Liquidation Advice

If you’re thinking about closing your company, it’s really important to get advice from people who know what they’re talking about. At Company Debt, we have licensed experts you can talk to. You can chat with us online, call, or even meet us face-to-face.

It’s a good idea to talk to more than one expert to make sure you’re getting the full picture.

What Happens to Company Assets and Debts in Liquidation?

When a company enters liquidation, the appointed liquidator takes control of all assets belonging to the company. These assets are sold off through different means like auctions or negotiated sales to other businesses or investors.

Any proceeds obtained from the asset sales go into a liquidation account. This account is used by the liquidator to pay off any fees, creditors, and shareholders in order of priority.

Who Gets Paid First in Liquidation?

  • Secured creditors who have claims over specific assets will get first priority in repayment from the sale proceeds of those assets.
  • Next in line are preferential creditors like employees who are owed wages and benefits.
  • Unsecured creditors are the last priority and often do not recoup their full debts.

Once all creditor claims are resolved, any remaining sale proceeds are distributed to the company shareholders.

Does Liquidation Write off Company Debt?

Typically, any debts that the liquidator cannot repay from the funds raised via the sale of company assets are written off in most cases, with exceptions for debts covered by personal guarantees and liabilities arising from wrongful or fraudulent trading.

Read our full article on here on When Can Directors be Held Personally Liable for Debts?

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What are Employee Rights During Company Liquidation?

During company liquidation, employees have rights including consultation on redundancies, notice periods, statutory redundancy pay for those with at least two years’ service, payment for unpaid wages and benefits as preferential debts, protection of pension rights, and provision of employment records to the Insolvency Practitioner.

Directors must also provide the Insolvency Practitioner with detailed employee records, such as employment contracts, payslips, and holiday records.

Read our full article on What Happens to Employees During Liquidation

How Long Does the Liquidation Process Take?

There is no set time frame to liquidate a company, and with several variables dependent on each case, timeframes will vary widely.

The business can be placed into liquidation within two to three weeks for less complicated cases, providing all sufficient information is disclosed promptly.

The complete liquidation process can take around one year on average but longer when a larger company is involved.

The timeframe between the initial winding-up petition and the end-of-court proceedings is typically three months for compulsory liquidation.

What Happens After I Have Liquidated my Company?

After your company has been liquidated, its legal and operational existence comes to an end. This finality means you, as the former owner or director, are no longer responsible for its debts, assuming the liquidation process was completed in compliance with legal requirements.

Here’s what happens next for you:

  • Your responsibility for the company’s debts ceases, provided there was no wrongful or fraudulent trading. It’s a significant relief, as the financial burdens associated with running the company are lifted.
  • You’re now in a position to start anew. This could mean setting up a new business, taking up employment, or even retiring, depending on your personal circumstances and ambitions.
  • While the company might be dissolved, there could still be some reporting or compliance requirements you need to fulfil post-liquidation.

Directors’ Responsibilities and Liabilities

As a director, you have specific legal responsibilities during the liquidation process. Full cooperation with the insolvency practitioner is essential, requiring you to provide all necessary documents, such as financial records and asset inventories.

In the context of liquidation, certain actions or failures to act can expose you to personal liabilities. This risk arises primarily from obligations to act in the best interests of your company and its creditors, especially when the company is insolvent or nearing insolvency.

You may face personal liabilities if you fail to meet your duties, particularly in instances of wrongful or fraudulent trading. Wrongful trading occurs when you continue your company’s operations despite knowing it cannot avoid liquidation. Fraudulent trading involves intentional deceit to evade debts.

Risks of Company Liquidation

Liquidating a company comes with several downsides that can have lasting impacts:

  1. Asset Loss: When you liquidate, the company’s assets are sold to pay off debts. If there’s not enough from the sale, you might not get back any money you put into the business.
  2. Personal Liability: If you’ve personally guaranteed any of the company’s debts, those could fall on you to pay back once the company is liquidated.
  3. Credit Damage: The credit scores for both the company and possibly its directors could drop, making it harder to get loans in the future.
  4. Unpaid Debts: There’s a chance not everyone the company owes money to will be paid back in full. This could hurt your reputation and relationships in your industry.
  5. Employee Redundancy: Liquidation means your employees will be out of work. There might also be legal requirements to make redundancy payments, which could be tough if the company is struggling financially.

How to Liquidate a Company

To start liquidating your company, first, talk to a financial expert or insolvency practitioner to understand your options. Then, as a director, you need to agree on this decision with other directors and get approval from shareholders. After that, appoint a licensed insolvency practitioner to manage the liquidation.

If you’re unsure about any of these steps or need more guidance, we at Company Debt are here to help. Get in touch with us via live chat, telephone, or email for expert advice and support through this process.

Company Liquidation FAQs

The company’s debts are paid off using the realised assets during the liquidation process. What cannot be paid ends with the dissolution of the company.

During the liquidation process, any remaining assets are distributed among the shareholders in accordance with the company’s articles of association. However, it is unlikely that shareholders will receive any returns in the case of liquidation.

Yes, directors can be held personally liable for the company’s debts in certain circumstances, such as if the was traded while insolvent or if the directors have acted fraudulently or recklessly.

Yes, it is possible to avoid liquidation by restructuring the company’s operations, seeking alternative solutions such as a company voluntary arrangement or administration, or finding a buyer for the company. It is important to seek professional advice to achieve the best outcome.