A Guide on How to Enter Company Liquidation and the Liquidation Process
Liquidation refers to the procedure in which a limited company is brought to an end, with any assets being liquidated and redistributed. The company is then struck off the registrar of companies, and this is known as dissolution, which is the final stage of the liquidation process.
If you are looking at closing your company, the way that you do so will depend on its circumstances. If the company has traded in the past three months or is insolvent, simply applying to have it struck off the register via dissolution will not be appropriate, and you will need to liquidate the company to close it.
Initial Points to Consider
There are two ways of liquidating a company voluntarily, and the route you take will depend on whether the company is solvent, or insolvent. The third example is not a voluntary process. All three examples of liquidation are covered briefly on this page. We will explain the two options for voluntary liquidation and also the third procedure which is outside of the director’s control and is usually initiated by the company’s 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 difficulty, so you should consider whether you want to explore 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 Process and How to Liquidate a Company
There is no one set process for liquidating a company as each type of liquidation follows a different path. We have covered each procedure briefly below, and you can click on the links within each section for a detailed breakdown of what to expect, as well as the stages of the procedures.
Once you are clear on the different types of liquidation available, you can choose the most appropriate option for you and your company. Insolvency Practitioners are required for the liquidation process, and these professionals have the responsibility to act as an impartial, third-party and to oversee the liquidation from beginning-to-end. Their role 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, as well as distributing the realised assets to the appropriate parties.
In this section, we will cover the two forms of voluntary liquidation available to companies within the UK.
A Creditors’ Voluntary Liquidation is also known as a ‘CVL’, and this procedure is only appropriate for insolvent companies and can be chosen by a company director if the company is unable to pay its bills on time. People to whom your company owes money are referred to as creditors and these can consist of both secured and unsecured creditors. The creditors may be demanding payments that the limited company simply cannot afford to pay.
The Liquidator (appointed Insolvency Practitioner), then liquidates the company’s assets and uses the proceeds of the sale to pay its creditors. As the company is insolvent, there will be no proceeds left to distribute to the shareholders.
If your limited company is insolvent and is finding it hard to pay the bills on time, and you don’t feel that the business is currently viable, a Creditors’ Voluntary Liquidation may be the appropriate option. Although it should be seen as a last resort, liquidating a company via this route can be considered as a rational decision at this late stage and may not mean the end of business.
Closing your company via a Creditors’ Voluntary Liquidation will enable you to write off unsecured limited company debts that are not personally guaranteed. Directors may see this type of liquidation as a welcome and safe exit from a stressful situation, while at the same time, addressing all of the creditors appropriately. If your limited company has debts that it cannot afford to pay and you want to move on without the stress of company debt hanging over your head, this type of business liquidation is likely to be the best option.
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 that the directors may be considering. You may consider a Members’ Voluntary Liquidation when you have a company that you want to close and for whatever reason 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. This lower rate of tax is referred to as Entrepreneurial Tax Relief and can be as low as 10%.
The process of extracting cash or the value of assets, such as property, in a more tax efficient way may be via Entrepreneurial Tax Relief, or may simply be due to the proceeds being treated as capital and not income. Capital receipts are taxed at lower rates. In simple terms, it’s likely that in this case you will pay a lower rate of tax on the proceeds you receive than if you were to try and extract the cash or assets another way.
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 usually begins with a statutory demand being served and also includes a winding up petition, petitioning for the judge to hear the case at court, for an amount owed. This form of liquidation is often used as a last resort by disgruntled creditors after failed negotiations. The creditors may want to liquidate the company’s assets, or extract cash and allocate a distribution of these across all of the relevant creditors to repay a debt that is overdue. This is usually handled by the Official Receiver, or appointed Insolvency Practitioner. Therefore, this is not a voluntary process for directors.
Compulsory liquidation does involve the courts. The creditor presents a winding up petition to the court, and a hearing follows. The judge will decide whether to issue a winding up order. If the order is issued, the court will appoint an official receiver, or appointed Insolvency Practitioner to liquidate the company.
The official receiver oversees and investigates the company’s affairs. They have many roles, and the key role is to get the best return for the creditors. Additionally, they must investigate the directors to see if there has been any irresponsible trading which may have contributed to the company’s situation. During this process the company bank account is usually frozen. The liquidation is advertised on the London Gazette as part of the insolvency proceedings for a limited liability company (LLC).
If you do not act immediately this situation can escalate quickly, so do not ignore any threat of a winding up petition. You should speak with someone who has expert knowledge of how to liquidate a company and who can guide you through this process, safely.
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 closing down 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 your 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 form of liquidation is 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’ Voluntary Liquidation and Members’ Voluntary Liquidation.
- 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 and Bankruptcy only apply to individuals, not limited companies.
For free, 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 07785 701 151.
Useful Resources and Related Content
Liquidate your Company Overview: https://www.gov.uk/liquidate-your-company/overview
Closing a Limited Company: https://www.gov.uk/closing-a-limited-company
What Liquidators Do: https://www.gov.uk/liquidate-your-company/what-the-liquidator-does
Written by: Mike Smith