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Liquidation is a commonly used term in business law, finance and economics for liquidating a company.
See below for all the information you need about company liquidation, in terms of process, timeframes and potential costs.
What does Liquidation Mean?
The term ‘liquidation’ refers to the process of closing down a company and distributing its assets.
Under UK law, liquidation is a formal procedure, in which a limited company is closed down by an appointed licensed insolvency practitioner (liquidator).
Liquidation means the company’s assets are sold (liquidated) and any realisation of revenue is redistributed in order of priority amongst creditors and/or shareholders.
The final stage of the process is where the company has been finally liquidated, which is when the the company is removed from the registrar of Companies House and ceases to exist legally.
Liquidation can be used to close both solvent companies (those that can pay their debts and/or where assets are greater than liabilities) and those which are insolvent (bankrupt).
The laws surrounding company liquidation in the UK are primarily defined by the Insolvency Act 1986.
What Happens When a Company Goes into Liquidation?
When a company goes into liquidation, it ceases to trade, staff will be made redundant, and the company itself will cease to exist as a legal entity.
As a director, your powers will cease, and you’ll no longer be able to access business bank accounts.
For solvent companies, liquidation is a tax efficient choice for businesses with assets to dispose and no debts.
If you’re insolvent (in debt), a licensed insolvency practitioner will organise the liquidation of corporate assets, and the proceeds are then distributed to the company’s creditors
Finally, the company will be struck off the register at Companies House. The company has been liquidated and will no longer exist.
Understanding the Different Types of Limited Company Liquidation
The liquidation of a company can be done in three different ways. All require the assistance of a liquidator.
The compulsory procedure is usually initiated by creditors like HMRC via a court order.
Read more on all three types below.
Creditors Voluntary Liquidation
1. A Creditors’ Voluntary Liquidation (CVL) used by insolvent companies and is initiated by a shareholders’ resolution.
This involves the dissolution of the insolvent company and the redistribution of any assets to the creditors. This procedure enables directors to write off unsecured business debts that are not personally guaranteed.
Directors may see insolvent liquidation as an exit from financial difficulty; whilst addressing all of the creditors, appropriately.
Members Voluntary Liquidation (or Solvent Liquidation)
2. A Members’ Voluntary Liquidation (MVL) is the appropriate way to liquidate a solvent UK company and can be used as part of an exit strategy.
A solvent liquidation may be considered if you have a company that you want to close as part of your business plan and reduce taxation. MVL’s allow you to pay less capital gains tax (at 10% on all qualifying assets)
Your company may have outlived its purpose and be heading towards a natural end of trading, or you may wish to extract the value of cash and assets from the company in a tax efficient manner.
The insolvency practitioners will realise business assets at fair value, before dissolving it.
Compulsory liquidations are usually initiated by a creditor that is looking to force a business that cannot pay its debts into closure via a court order application due to non payment of debt. Most commonly, this is HM Revenue & Customs (HMRC), however, it can be initiated by any creditor owed more than £750.
In the UK, the Limitation Act 1980 allows up to six years for a creditor to commence legal action to recover a business debt in England and Wales.
The compulsory process is usually instigated with a winding up petition. Once it is heard at court, it can become a winding up order.
This procedure is often used to wind up your business as a last resort by creditors after failed negotiations over missed payments.
This insolvency procedure is usually handled by the Official Receiver or appointed liquidator.
The conduct of the directors is reported back to the UK Secretary of State at the end of the liquidation proceedings and failure to co-operate with the Official Receiver can have serious repercussions.
The Liquidation process is as follows:
- An Insolvency Practitioner is appointed as Liquidator.
- Directors’ powers cease and the IP takes over the management of the company’s affairs.
- The company’s assets are then assessed and realised (liquidated).
- If there are any creditors they are then paid in order of priority.
- Surplus cash is distributed to the shareholders.
- The company is finally liquidated and struck-off the registrar of companies (Companies House).
There is no set time-frame to liquidate a company and with several variables dependent on each case, timeframes will vary widely.
However, once engaged, the liquidators will act immediately and the business can be placed into liquidation within a two-to-three week period if sufficient information is provided.
The complete liquidation process itself can take around one year on average, but longer when a larger company is involved.
For a compulsory liquidation, the timeframe between the initial winding up petition and the end-of-court proceedings is typically three months.
Priority of Claims
Who gets paid first in a liquidation? This is decided by what is called the ‘priority of claims.’
You can read more about who gets paid and in what order , including how employees are addressed.
Briefly, the order is as follows:
- Any secured creditor (often banks, these lenders will seize the collateral and sell it)
- Expenses incurred by the insolvent estate
- The insolvency practitioners
- Preferential creditors (which include employees and now HMRC)
- Unsecured creditors
Do Employees Get Paid?
What does liquidation mean for a company employee? And do they get paid?
Employee wages, wage arrears, holiday pay and notice pay are all covered up to certain statutory limits by the Redundancy Payments Office of the Department of Trade and Industry.
What Happens to the Directors?
The most important thing for directors to realise when liquidating a company is that their responsibilities undergo a marked shift if the business becomes insolvent.
Once insolvent, the company’s directors must prove they have acted in the best interests of the creditors. To avoid the risk of personal liability, it is important that directors act responsibly and take professional advice, immediately.
Directors should be aware of the fact that once an Insolvency Practitioner is appointed, they will have a responsibility to investigate the actions of company directors during the period preceding the liquidation.
Principally, the liquidator looks for clarification that, as soon as the director became aware of the situation he/she put the interests of creditors first. Where this is not the case, the director becomes open to charges of wrongful or fraudulent trading .
In cases where this can be proven, the director may become personally liable for some or all of the company debts .
The Role of a Liquidator
An appointed and licensed liquidator (IP) is required for liquidation and they have several duties in their position.
These are experienced professionals have the responsibility to act as an impartial, third-party to oversee the process from beginning to end, after their appointment.
The role of a liquidator encompasses various responsibilities which include, but are not limited to:
- Creating a Statement of Affairs document for the creditors, with the assistance of directors. This is a financial statement explaining the business’ position in some detail
- Distributing the realised assets and surplus funds to the appropriate parties
- Determine any outstanding claims against the business and satisfy those claims in order of priority that is set by law
Costs & Fees of Liquidating a Company
The average liquidation of a small business in the UK costs around £4,000 to £6,000 + VAT, however, this can vary dependent on a number of variables such as the size of the company and volume of creditors.