How does liquidating a limited company work?
Liquidation, meaning the formal closure of either a solvent or insolvent company, is a straightforward process with a number of clear stages.
In this article we’ll go through these all these types of liquidation in detail, so that you know just what to expect.
What’s the Liquidation Process for an Insolvent Company?
When people speak of liquidation it’s most commonly of an insolvent company so we’ll begin with that.
(1) When a director becomes aware that the company is insolvent you’ll need to take professional advice immediately. ]
It may be useful to speak with your accountant but ultimately you will need to use a licensed insolvency practitioner.
Insolvency means you either:
- Cannot pay your bills when due, or
- your financial liabilities outweigh business assets
In both these scenarios your responsibilities as director switch, immediately, towards creditors.
It’s important you realise this and take steps to ensure you can demonstrate that any actions taken, from that point forward, are to the benefit of company creditors.
Failure to do so could place you open to charges of wrongful trading further down the line.
It’s important to point out that insolvency doesn’t always end in liquidation. Insolvency practitioners are also adept at business rescue, and there are a number of mechanisms to achieve this.
(2) If liquidation is next, you’ll be faced with either a creditors voluntary liquidation (voluntary liquidation process) or a compulsory liquidation.
The latter option is less flexible and means you’ll have less control over the process.
The Process of Voluntary Liquidation, Step by Step
- Shareholders vote to pass a resolution to wind up
- Company director’s powers cease
- Winding up Resolution is formally submitted to Companies House
- The creditors voluntary liquidation (CVL) is advertised in the London Gazette, the Official Journal of Public Record.
- The liquidator sells any company assets and distributes process to creditors.
- As part of the liquidation process the insolvency practitioner will have to undertake a directorial investigation in order to check that no misfeasance took place in the period preceding liquidation.
- At the end of the process, the company is formally struck off the register at Companies House and ceases to exist.
Compulsory Liquidation Process
- Compulsory liquidations are preceded by a winding up petition which is a final demand letter which precipitates a court hearing. If the judge finds against the debtor company he/she rules a Winding up Order which places the company into immediate compulsory liquidation.
- Corporate bank accounts are frozen by the bank
- A liquidator is appointed by the Court (Official Receiver) who begins the liquidation process.
- If there are company assets to be sold, the Official Receiver’sduties will be taken on by a licensed insolvency practitioner to complete the process.
Who Gets Paid First?
The order of creditors is established in law as follows:
- Secured Creditors (commonly banks)
- Preferential Creditors (employees + HMRC)
- Unsecured Creditors
Read our full article here on the Order of Creditors in Liquidation
What’s the Liquidation Process for Employees?
A key concern of directors is always the rights of employees during this situation. Will they be entitled to redundancy?
The answer is yes, but up to certain statutory limits. It’s possible to claim for wage arrears, holiday pay, notice pay, unpaid pension contributions, maternity pay and redundancy.
Read our full article here on employee rights in insolvency.
Directors powers cease once the insolvency practitioner (IP) has been formally appointed, although you are legally required to cooperate and provide relevant information.
At the beginning of the process the IP will create an important document called the Statement of Affairs, outlining the company situation and likely returns for creditors. The directors input is always needed at this point.
Directors may apply for redundancy payments, as with employees, assuming they have taken a salary from the company and pay PAYE.
Assuming no corporate misfeasance is discovered, directors are not help personally liable for company debts and are free to assume a new role elsewhere.
Liquidation will not have an impact on your personal credit record, unless there has been a defaulted personal guarantee.
Solvent Liquidation Process
It is possible to close down a solvent limited company yourself but where there are significant assets the more tax effective method is to use a process known as members voluntary liquidation.
The members voluntary liquidation (MVL) procedure works as follows:
- Any business creditors are repaid
- Directors sign what is called a Declaration of Solvency
- Shareholders vote upon and pass the Resolution to Wind Up
- Director appoints an Insolvency Practitioner to sell any assets
- The solvent liquidation is advertised in the London Gazette
- At the end of the process the company will be struck off the register and cease to exist