Company Liquidation: Explained for Directors
- What does liquidation mean?
- Types of Company Liquidation
- The liquidation process in the UK
- Factors to consider before opting for liquidation
- Can I liquidate a company myself?
- Liquidation timeline: how long does it take to liquidate a company in the UK?
- Directors’ liabilities and obligations: legal consequences of liquidation
- The role of an insolvency practitioner (IP) in process of liquidation
- Alternatives to company liquidation
- Liquidation FAQs: Common Questions and Answers About Company Liquidation
What does liquidation mean?
The term ‘liquidation’ refers to the formal corporate insolvency procedure in which a company is brought to a close by a licensed insolvency practitioner (liquidator), and its assets are distributed amongst any creditors and/or shareholders.
In the UK, there are several types of liquidation, including a Creditors’ Voluntary Liquidation (CVL), compulsory liquidation, and Members’ Voluntary Liquidation (MVL) which may be appropriate for solvent limited companies.
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 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.
The 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:
- 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.
- 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.
- 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.
- Distributing remaining assets: Any remaining assets are then distributed among the shareholders.
- 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.
- 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.
- 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.
- 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.
- Impacts on stakeholders: It is essential to understand the potential impacts and consider alternative options that may be less damaging to their interests.
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.
Liquidation timeline: how long does it take to liquidate a company in the UK?
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.
Directors’ liabilities and obligations: legal consequences of liquidation
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.
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.
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 process of 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 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 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.
Alternatives to company liquidation
Many directors believe that dissolution is an alternative to company liquidation. However, if a limited company has debts, it cannot be simply struck off without first going through a formal liquidation procedure or without attaining 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.
Liquidation refers to the process by which a limited company is brought to an end. The procedure includes the company’s assets and cash being realised and then re-distributed in a specific order.
When entering liquidation, your powers as a director cease. However, your duties once the process begins become more onerous.
There are three different types of liquidation with two being voluntary processes (one solvent and one insolvent) and one compulsory procedure.
All of the liquidation procedures must involve a licensed insolvency practitioner (you cannot do it yourself), and they will manage the affairs of the process from start to finish.
The timeframes to complete the procedure can vary. However, it typically takes a year for a company to go through the full process end-to-end.
Get clued up on the details of your options before you engage an insolvency practitioner, and be sure to communicate with them clearly.
Possible alternatives depend on whether the company is viable or has debts. These include dissolution, a company voluntary arrangement, or corporate administration.
Liquidation FAQs: Common Questions and Answers About Company Liquidation
Yes, a company can be rescued during the liquidation process. This is known as a pre-pack administration and involves the sale of the company’s assets to a new buyer before its liquidation.
Employees will be made redundant during the liquidation process. The liquidator is responsible for ensuring that employees are treated fairly and are informed about their entitlements to receive redundancy payments.
The company’s debts are paid off using the realised assets during the liquidation process. What cannot be paid ends with the dissolution of the company.
During the liquidation process, any remaining assets are distributed among the shareholders in accordance with the company’s articles of association. However, it is unlikely that shareholders will receive any returns in the case of liquidation.
Yes, directors can be held personally liable for the company’s debts in certain circumstances, such as if the company was traded while insolvent or if the directors have acted fraudulently or recklessly.
Yes, it is possible to avoid liquidation by restructuring the company’s operations, seeking alternative solutions such as a company voluntary arrangement or administration, or finding a buyer for the company. It is important to seek professional advice to achieve the best outcome.