Company Liquidation: A Guide to Liquidating a Limited Company

As a director facing financial difficulties, you may be considering liquidating your limited company. This article provides an overview of what the liquidation process involves so you can understand what to expect.

Company Liquidation

Liquidation, also known as winding up, is the formal process of closing down an insolvent company by selling its assets and distributing the money raised to creditors and shareholders.

You could pursue a few different types of liquidation, each with its own procedures. The article walks through the typical timeline for liquidation, the steps taken to wind down a company’s affairs, and the appointed insolvency practitioner’s role.

It also explains directors’ potential liabilities during liquidation and outlines some alternative options that may be better for your company.

The goal is to give you a high-level understanding of liquidation, its implications for directors like yourself, and key considerations when deciding if it’s the right path forward for your struggling business.

What does company liquidation mean?

The concept of ‘company liquidation’ denotes a regulated procedure wherein a company ceases its operations and its assets are allocated among creditors and shareholders, all under the oversight of a licensed insolvency practitioner, known as a liquidator.

In the United Kingdom, liquidation can take the form of a Creditors’ Voluntary Liquidation (CVL), which is initiated by the company directors when they ascertain that the company can no longer meet its financial obligations.

There’s also Compulsory Liquidation, which is usually the result of a court order pursued by creditors.

Lastly, a Members’ Voluntary Liquidation (MVL) is an option for solvent companies that want to wind up their operations in an orderly manner.

The chosen form of liquidation is often dictated by the company’s financial standing and the specific circumstances leading up to the decision to close.

Why might a company go into liquidation?

Liquidation is the closure of a company, and it can occur for several reasons:

1. Insolvency: Unable to pay debts or liabilities exceed assets.
2. Strategic Choice: Voluntary decision to close the business.
3. Regulatory Issues: Non-compliance with legal requirements.
4. Market Conditions: Adverse changes in market or industry.
5. Contract Failures: Legal or contractual disputes.
6. Lack of Succession Planning: No planning for future leadership.
7. Shareholder Disagreements: Irreconcilable differences among owners.
8. External Pressures: Such as natural disasters or economic crises.

Types of Company Liquidation

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

The three types of liquidation are as follows:

Creditors’ Voluntary Liquidation (CVL)

A Creditors’ Voluntary Liquidation (CVL) is the official term for a voluntary liquidation process used to close down an insolvent company. A shareholders’ resolution initiates it.

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.

Directors may see insolvent liquidation as a credible exit route from financial difficulty; whilst addressing all of the creditors professionally and appropriately.

Compulsory liquidation

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

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 (the Insolvency Act 1986 Trusted Source and the Insolvency (England and Wales) Rules 2016 (SI 2016/1024). Once it is heard in 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. Therefore, this is not a voluntary process for directors.

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.

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.

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)

For an MVL, the directors must sign a declaration stating that there are no remaining creditors.

The insolvency practitioners will realise business assets at fair value before dissolving the company.

How does liquidation work?

Liquidation involves selling the company’s assets, settling outstanding debts, and distributing any remaining funds to shareholders or other stakeholders.

The liquidation process can be initiated voluntarily by the company’s directors or forced by creditors if the company is insolvent.

In the following section, we’ll delve into the specific steps involved in the liquidation process, the roles and responsibilities of those involved, and the legal and financial implications for the company and its stakeholders.

The company liquidation process in the UK

The UK liquidation process involves several steps designed to wind up a company’s affairs and distribute its assets fairly to creditors and shareholders.

The following is an overview of the critical steps:

1. Appointing a liquidator: The liquidator manages the liquidation process and ensures that the company’s affairs are wound up efficiently and fairly. The company’s directors, shareholders, or the court can appoint the liquidator in the case of compulsory liquidation.
2. Realising assets: The liquidator’s next step is to identify and sell corporate assets ( property, inventory, machinery etc.) or collect outstanding debts. The assets are then used to pay off the company’s creditors.
3. Paying off creditors: Once the assets have been realized, the liquidator is responsible for paying off the company’s creditors, in order of priority, as set out in the UK’s Insolvency Act 1986.
4. Distributing remaining assets: Any remaining assets are then distributed among the shareholders.
5. Closing the company: Once all the creditors have been paid, in order of priority, and the remaining assets have been distributed, the liquidator closes the company. The company will be struck off the register of companies and will cease to exist as a legal entity.

It is important to note that the liquidation process can take several months to complete, and the exact length of time will depend on the size and complexity of the company and the nature of its assets and debts.

The liquidator is responsible for keeping stakeholders informed of the liquidation’s progress and ensuring that the process is carried out fairly and transparently.

Factors to consider before opting for liquidation

Before opting for liquidation, it is essential to consider several key factors carefully.

1. Financial viability of the company: Does the company have a future? If the company is financially viable, it may be possible to restructure its operations and avoid liquidation.
2. Alternatives to liquidation: It is important to consider alternatives to permanently closing the company, such as a company voluntary arrangement (CVA), administration, or a merger or acquisition. These alternatives may provide a better outcome for the company, its shareholders, and its creditors.
3. Legal implications of liquidation: Liquidation has legal implications for the company and its directors, including the potential for personal liability for the directors and the potential for the liquidator to bring legal action against the directors for wrongful or fraudulent trading.
4. Impacts on stakeholders: It is essential to understand the potential impacts and consider alternative options that may be less damaging to their interests.

What are the duties of Directors during Liquidation?

During the process of liquidation, the directors of a company in the UK are obliged to fulfil several specific and critical duties, as they transition from managing ongoing operations to overseeing the winding-up of the company.

These responsibilities are underpinned by statutory regulations, and failure to comply can lead to legal consequences. Here are the primary duties:

1. Cooperate with the Liquidator: Once the liquidator is appointed, the directors must provide full access to the company’s books, records, and any other information needed to carry out the liquidation process.
2. Act in Creditors’ Best Interests: Directors must ensure that actions taken during liquidation prioritise the interests of creditors and comply with relevant insolvency laws.
3. Cease Trading: If the liquidation is due to insolvency, the directors must cease trading immediately to prevent further debt accumulation. Continuing to trade while insolvent may lead to personal liability.
4. Assist with Asset Realisation: Directors must assist the liquidator in identifying and valuing assets to be sold, ensuring the accurate and lawful distribution of proceeds.
5. Notify Relevant Parties: Directors are responsible for informing all relevant parties, including employees, suppliers, and customers, of the liquidation, in accordance with legal requirements.
6. Adhere to Legal Obligations: Compliance with all legal obligations, such as filing necessary documents with Companies House and adhering to employment laws, is essential.
7. Avoid Conflicts of Interest: Directors must avoid any actions that could lead to conflicts of interest, ensuring transparency and integrity throughout the process.
8. Maintain Accurate Records: Even during liquidation, directors must continue to keep precise financial records, reflecting all transactions and decisions made during the process.
9. Preserve Company Property: Directors must take steps to secure and preserve the company’s property, aiding the liquidator in maximising the value obtained for creditors.

Can I liquidate a company myself?

The short answer is no; you cannot liquidate a company yourself.

All company liquidations require the services of a liquidator under UK law.

Dissolution is not an option either since striking-off a business with debt is against the law.

The laws on this are intended to ensure a fair process. Using a licensed insolvency practitioner ensures that the company’s assets are valued correctly as they will use trusted valuation services and that creditors are treated equitably. It is also important that the insolvency practitioner examines whether directors have acted responsibly or engaged in what is referred to as wrongful trading.

Many directors, rightly concerned about costs when money is scarce, fear they will be unable to pay for the process. Fortunately, almost all liquidations can be paid for via the realisation of company assets.

Directors should also be aware they may be eligible for directors’ redundancy payments.

Contact one of our team for a confidential discussion on how your company liquidation might be funded if this is an area of concern.

Can My Company Continue to Trade Whilst in Liquidation?

The decision to liquidate a company in the UK mandates an immediate cessation of trading. Directors must heed this requirement; failure to do so can lead to serious consequences. If found to be trading while insolvent, directors may be held personally liable for the company’s debts, incurring penalties like wrongful trading charges. They could also be prohibited from acting as a company director for up to 15 years.

The fundamental objective of liquidation is to wind up the company, and in most cases, continuing to trade is not an option once the process has commenced. Any trading activity post the official start of liquidation is contrary to the purpose of liquidation and must be avoided to comply with legal obligations.

How long does liquidating a company in the UK take?

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. 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.

How much does liquidation cost?

The cost of liquidation in the UK can vary widely depending on the complexity of the company’s financial situation, the number of creditors, the assets involved, and the specific method of liquidation used. Here’s a breakdown:

1. Creditors’ Voluntary Liquidation (CVL): As you’ve noted, the CVL of a company, where there are few assets and a small number of debtors, typically costs between £4,000 to £6,000 + VAT. This is a common route for insolvent companies, and the fee generally includes professional fees for the insolvency practitioner acting as the liquidator.
2. Members’ Voluntary Liquidation (MVL): If a company is solvent and the liquidation is voluntary, the costs can be different. The MVL process generally involves less complexity, but fees will still vary based on factors such as the number of shareholders and the complexity of the asset distribution.
3. Compulsory Liquidation: Costs for compulsory liquidation, initiated by creditors through the court, can be higher due to legal fees and court costs. These can vary widely based on the complexity of the case.
4. Additional Costs: In some liquidations, additional costs may arise for asset valuation, legal advice, or handling complex creditor claims. These would be over and above the standard liquidation fees.

In conclusion, while there are general guidelines for specific types of liquidation, the actual cost will depend on various factors related to the company’s situation and the liquidation method chosen. It would be advisable to consult with a licensed insolvency practitioner or legal professional to obtain a detailed estimate tailored to the specific circumstances of the company.

What are the consequences of company liquidation for directors?

The most important thing for directors to realise when liquidating a company is that their responsibilities change as 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, directors must act responsibly and take professional advice immediately.

Directors should be aware that once an Insolvency Practitioner is appointed, they will be responsible for investigating company directors’ actions during the period preceding the liquidation.

Directors Role in the Liquidation

Directors have a legal duty to cooperate with the IP and provide them with any information or documentation that they need to perform their duties. This includes providing the IP with access to company records, bank statements, and financial documents.

Once the IP is appointed, the role of the directors in the liquidation process is otherwise limited.

Wrongful Trading

As part of their duties during a company’s liquidation process, an insolvency practitioner (IP) is required to investigate the conduct of the company’s directors in the period preceding insolvency. This is because the IP is tasked with identifying any misconduct or wrongdoing by the directors that may have contributed to the company’s situation.

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 wrongful or fraudulent trading charges; they can face personal liability for the debts of the company, fines, disqualification, and even criminal prosecution.

In cases where this can be proven, the director may become personally liable for some or all of the company’s debts.

Personal Guarantees

During the course of running a company, directors may have provided personal guarantees to secure loans or other forms of credit for the company. In the event of liquidation, these guarantees may be called upon by the company’s creditors, and directors may be personally liable for the debts of the company.

If a director is unable to meet the obligations of a personal guarantee, they may be subject to legal action, including bankruptcy proceedings.

The role of an insolvency practitioner (IP) in company liquidation

An appointed, licensed insolvency practitioner is required to process a corporate liquidation, and they have several duties in their position.

Once appointed, the insolvency practitioner is referred to as a liquidator.

These experienced professionals are responsible for acting as 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 the order of priority that is set by law.
• The IP is also charged with investigating any wrongdoing that may have occurred at any point throughout the company’s life.

What happens after Liquidation?

After the liquidation process has been completed in the UK, several key outcomes and actions take place:

1. Company Dissolution: Once all assets have been realised and debts paid off, the company is formally dissolved. It ceases to exist as a legal entity, and its registration is struck off the Companies House register.
2. Distribution of Remaining Funds: If there are any remaining funds after settling the company’s debts, they are distributed to shareholders according to the company’s legal structure and any specific agreements in place.
3. Director Responsibilities: Directors are relieved of their duties, but any findings of wrongful or fraudulent trading during the liquidation could still lead to legal consequences, such as disqualification from acting as a director for a specified period.
4. Employee Matters: Any remaining issues related to employees, such as redundancy payments, are resolved in accordance with employment laws.
5. Creditors: Creditors are informed of the completion of the liquidation process, and any remaining unpaid debts are typically written off, unless personal guarantees are involved.
6. Record Keeping: Relevant documents and records must be retained for a prescribed period, usually up to six years after dissolution, in case of any subsequent legal inquiries or investigations.
7. Final Reporting: The liquidator will generally prepare and submit a final report to the creditors, outlining the actions taken during the liquidation and the final disposition of the company’s assets.
8. Release of the Liquidator: The liquidator’s role concludes with their release, either automatically after a set time or through a formal process involving creditors’ approval.

What are the alternatives to company liquidation?

Dissolution

Many directors believe that dissolution is an alternative to company liquidation. However, if a limited company has debts, it cannot be struck off without first going through a formal liquidation procedure or without the creditors’ approval.

Company Voluntary Arrangements (CVA)

A CVA may be a sensible alternative to liquidation. However, this procedure is only applicable where the company has the potential to still be viable if the creditors were to agree to a formal payment plan.

Company Administration? Administration can be considered as a temporary solution as the procedure applies what is referred to as a moratorium on the company. A moratorium helps to protect the firm from being forcefully closed, however, this process must eventually end with another formal solution such as a CVA.

Company Liquidation FAQs