Company Liquidation: Voluntary vs Compulsory
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.
What are the Different Types of Liquidation?
There are two voluntary liquidation procedures and one compulsory procedure. The voluntary procedures, which are initiated by the shareholders and directors are explained in more detail below and the compulsory procedure, which is usually initiated by creditors like HMRC via a court order, is also covered.
Voluntary Liquidation of an Insolvent Limited Company
A Creditors’ Voluntary Liquidation (CVL) used by 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 liabilities that it cannot afford to pay and you would like to move on without the stress of the company’s debts 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.
Voluntary Liquidation of a Solvent Limited Company
A Member’s Voluntary Liquidation (MVL) is the appropriate way to liquidate a solvent UK company 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 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. For an MVL, the directors must sign a declaration stating that there are no remaining creditors. One example of a creditor could be tax arrears with HMRC for VAT or PAYE, so this need to be considered before going into liquidation.
Compulsory liquidations are usually initiated by a creditor that is looking to force a company into closure via a court order application. The process is usually instigated with a winding up petition and 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 disgruntled creditors after failed negotiations over missed payments. This insolvency procedure is usually handled by the Official Receiver, or an appointed Insolvency Practitioner. Therefore, this is not a voluntary process for directors.
The conduct of the directors is reported back to the Secretary of State at the end of the liquidation proceedings and failure to cooperate with the Official Receiver can have serious repercussions.
If you cannot pay the creditor and 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 is to forcefully liquidate your company.
The Liquidation 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).
How Long Does it Take to Liquidate a Company?
There is no set time-frame to liquidate a limited company and with several variables dependent on each case, it is challenging to give an accurate time-frame without sufficient information. However, once engaged, the Insolvency Practitioners will act immediately and the company can be placed into liquidation within a two-to-three week period if sufficient information is provided, promptly. The liquidator will remain in office until all of their responsibilities have been addressed.
How Long Does a Creditors’ Voluntary Liquidation Take?
Once the decision is taken to liquidate, the time-frame can be fairly rapid, with the company in liquidation within around 14 days. There is a minimum statutory notice period for creditors of 7 days so, assuming 90% percent of shareholders agreed to the short notice, it could potentially happen in as little as 7 days.
What are the Time-Frames for Compulsory liquidation?
Prior to compulsory liquidation, the following stages follow these time-frames:
- Statutory Demand – If you’ve been sent one of these by a creditor, you have 21 days to pay it, or 18 days to set it aside.
- Application for a Winding up Petition Hearing – After the 21 day statutory demand, the creditor now has the right to apply for a Winding up Petition hearing. These can take up to 2 weeks, depending on how busy the court is.
- Winding up Hearing – There is a legal requirement to give a company 14 days written notice of a winding up hearing.
The Role of a Liquidator
An appointed licensed Insolvency Practitioner (Liquidator) is required for liquidation and they have several duties in their position. These 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:
- Distributing the realised assets and surplus funds to the appropriate parties;
- Determine any outstanding claims against the company and satisfy those claims in order of priority that is set by law;
- Investigating the affairs of the company and its directors;
- Checking for misconduct, wrongful or fraudulent trading; or illegal transactions that may have taken place.
What are the Potential Consequences of Liquidation for Directors?
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.
Directors should be aware 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 insolvency 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. If this can be proven, the director may become personally liable for some or all of the company debts.
Difference between Winding up, Liquidation & Bankruptcy
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.
Priority of Claims
Part of the Liquidator’s duties involves addressing the priority of claims during the insolvency process. You can read more about who gets paid and in what order, including how employees are addressed.
Alternative Options for Insolvent Companies
When you are considering liquidating a company 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. Insolvency procedures such as CVAs and Administration can be useful ways of restructuring a private company and would also require a licensed insolvency practitioner to supervise the process, professionally. One example of a benefit could be after an Administrator has been engaged and appointed they can apply for a moratorium to be implemented. This may give the business some breathing space and protection from further legal action taken by creditors. The business can then address its assets, liabilities and employees to help guide the company towards a state of recovery.
Free, Confidential Liquidation Advice
For free confidential advice on liquidating a private company and help with your current situation, please contact us on 08000 746 757 and enquire about our services. You can arrange a call back via our contact page at a convenient time, or book a 100% confidential meeting.
Author: Mike Smith