A Guide on Entering Company Liquidation: Voluntary vs Forced and the Liquidation Process.
Liquidation refers to the procedure in which a limited company is brought to a close by an appointed Insolvency Practitioner (Liquidator). The company’s assets are then sold (liquidated) and any realisation of revenue is redistributed in order of priority. The company is struck-off the registrar of companies and this is known as dissolution, which is the final stage of the liquidation process.
The Process in 5 Steps
The details of the process when voluntarily liquidating a limited company depend largely on the type of liquidation that is chosen. However, the five basic steps below are included within all of the procedures:
- An Insolvency Practitioner is appointed as Liquidator.
- 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 dissolved and struck-off the registrar of companies (Companies House).
What are the Different Types?
There are two types under insolvency law; voluntary, which is initiated by the shareholders and directors and compulsory, which is usually forced via creditors like HMRC and a court order.
They are also defined by whether the company is solvent or not.
Once you are clear on the different types 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 to the creditors. This procedure 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 and 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. An MVL may be considered if you have a solvent company that you want to close as part of your business plan and reduce taxation. 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. For an MVL, the directors must sign a declaration stating that there are no creditors.
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 procedure 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 the situation can escalate quickly. Do not ignore any threat in the form of a winding up petition as the intention here is to forcefully liquidate your company.
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 liquidating 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. These professionals have the responsibility to act as an impartial, third-party to oversee the process 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 if the company becomes insolvent. Once insolvent, the directors must prove they have acted in the best interests of the creditors. 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”). A contract of employment is usually required as evidence for any calculation basis and claim. Directors that have been on the payroll for years may also be entitled to redundancy pay from the government. We would be happy to provide you with more information on redundancy in these circumstances.
Liquidation and ‘winding-up’ are often used in the same context. 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 and shareholders would like to extract.
Sometimes people mistakenly refer to the phrase “company bankruptcy”. Bankruptcy is only relevant to an individual, partner, or sole trader and not a limited company.
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.