A Guide on How to Enter Company Liquidation Voluntarily and the Liquidation Process
Liquidation refers to the process in which a limited company is brought to an close by an appointed Insolvency Practitioner (Liquidator). The company’s assets are sold and redistributed (liquidated). The company is also struck off the registrar of companies, and this is known as dissolution, which is the final stage of the liquidation process.
Types of Liquidation
There are two types under insolvency law; voluntary, which is initiated by the shareholders and compulsory winding up, which is usually forced via a court order.
The types of liquidation are also defined by whether the company is solvent or not.
Once you are clear on the different types of liquidation available, you can choose the most appropriate option for you and your company.
A Creditors’ Voluntary Liquidation (CVL) is only intended for insolvent companies and is initiated by a shareholders resolution. It involves the dissolution of the insolvent company and the redistribution of the company’s assets. This form of liquidation enables directors to write off unsecured limited company debts that are not personally guaranteed. Directors may see voluntary liquidation as a welcome and safe exit from a stressful situation; whilst addressing all of the creditors, appropriately. If the limited company has debts that it cannot afford to pay and you would like to move-on without the stress of company debt hanging over your head, this type of business liquidation may be an appropriate option. Although it should be seen as a last resort, liquidating a company via this route can be considered a rational decision at this late stage. It may not necessarily mean the end of business.
A Member’s Voluntary Liquidation, or ‘MVL’, is the appropriate way to liquidate a company that is solvent and can be used as part of an exit strategy. A Members’ Voluntary Liquidation may be considered if you have a solvent company that you want to close as part of your business plan. Having the company struck off from the register of companies may not be the best option in this situation. Your company may have outlived its purpose, or you may wish to extract the value of cash and assets from the company in a tax efficient manner.
Compulsory liquidation is usually initiated by an unpaid creditor that is looking to force a company into closure via court claims, sometimes for debt recovery. The process is usually instigated by a winding up petition which is heard at court. This form of liquidation is often used as a last resort by disgruntled creditors after failed negotiations. This is usually handled by the Official Receiver or an appointed Insolvency Practitioner. Therefore, this is not a voluntary process for directors.
If you do not act immediately, this situation can escalate quickly, so do not ignore any threat of compulsory liquidation, or a winding up petition to liquidate your company.
The Process in 5 Steps
The details of the process when liquidating a limited company depend largely on the type of liquidation that is chosen. However, we have outlined five basic steps below that are included within all of the procedures. We have also covered each of them further down the page, including links for more detailed information.
- An Insolvency Practitioner is appointed as Liquidator.
- The company’s assets are then assessed and realised (liquidated).
- Any creditors are then paid in order of priority.
- Surplus cash is distributed to the shareholders.
- The company is finally dissolved and struck-off the registrar of companies (Companies House).
How Long Does it take to Liquidate a Company?
There is no set time-frame to liquidate a company. The liquidator will remain in office until all the assets have been distributed among the creditors.
When you are considering liquidation due to financial problems, take the time to compare all of the available options. There are other courses of action that may be available to companies in financial difficulty, so consider exploring these before you decide to close the company via liquidation. You may find that options such as a Company Voluntary Arrangement (CVA) or Administration will provide a viable way for the company to carry on trading.
The Role of an Insolvency Practitioner
An appointed Insolvency Practitioner (Liquidator) is required for liquidation. These professionals have the responsibility to act as an impartial, third-party to oversee the liquidation from beginning to end. The role of a liquidator encompasses various responsibilities which include, but are not limited to: investigating the affairs of the company and the directors; checking for any improper or illegal transactions that may have taken place; and distributing the realised assets and surplus funds to the appropriate parties.
What are the Potential Consequences?
The most important thing for directors to realise when liquidating a company is that their responsibilities undergo a marked shift as the company becomes insolvent. To avoid the threat of personal liability, it is important that directors act responsibly and take professional advice immediately.
Who is Entitled to Redundancy Pay?
Employees of insolvent companies that have gone into liquidation may be able to claim for statutory redundancy pay from the Department of Trade and Industry’s, Redundancy Payments Office (“RPO”). This includes:
- Up to 8 weeks salary
- Up to 6 weeks holiday pay
Liquidation and ‘winding up a company‘ are often used in the same context, however, do not be confused about the terminology. Both of these terms refer to liquidating a limited company; either because the company has cash-flow problems, or because there are cash and assets, such as property, that the directors & shareholders would like to extract.
Liquidation is sometimes mistakenly referred to as “company bankruptcy”, in fact; Bankruptcy is only relevant to an individual or a sole trader, and not a limited company.
- Take an inventory and consider alternative options first. Can the company be rescued with the use of Administration or a Company Voluntary Arrangement?
- Establish whether your company is solvent, or not. This will highlight which procedure is most appropriate.
- If your company is insolvent, act quickly to help improve your situation. Delaying the decision could make things worse.
- There are two forms of voluntary liquidation: Creditors’ and Members’.
- A Creditors’ Voluntary Liquidation is designed for insolvent companies.
- A Members’ Voluntary Liquidation is designed for solvent companies
- Compulsory liquidation is not a voluntary process for directors. This is usually initiated by creditors such as HMRC with the intention of forcing the company into closure.
- Try not to get confused with terminology. ‘Winding up’ can be used in the same context as Liquidation. Bankruptcy only applies to individuals, not limited companies.
For free and confidential advice on liquidating a company and help with your current situation, please contact us on 08000 746 757; or you can call Sue directly on 07949 969 006.