Company Liquidation Explained

Company liquidation is the structured process of dissolving a business, where its assets are liquidated and outstanding commitments to creditors and shareholders are fulfilled. As a director, business owner, or creditor, understanding this process is essential to protect your interests.

At Company Debt, we offer expert guidance and financial advice to navigate your business, whether insolvent or solvent, through liquidation. Our team is committed to providing you with the necessary support and information to manage this challenging phase effectively.

Liquidation; explained for directors, by insolvency practitioners

What Does Liquidation Mean?

Liquidation refers to the process of closing a company and distributing its assets to claimants. It typically occurs when a company is insolvent, meaning it cannot pay its debts. During liquidation, the company’s operations cease, its assets are sold off, and the proceeds are used to pay creditors, shareholders, and other stakeholders in a specific order of priority.

The liquidation process is conducted under the supervision of a liquidator, a professional appointed to manage the process, ensure the company’s assets are fairly distributed and that all legal obligations are met. The goal is to wind up the company’s affairs, settle its liabilities, and then dissolve the company, formally ending its existence.

Why Might a Company Go into Liquidation?

A company might go into liquidation for several reasons, primarily focused around financial difficulties:

  1. Insolvency: This is the most common reason. It means the company can’t pay its debts when they’re due.
  2. Unsustainable Debt Levels: Sometimes, even if a company is solvent, the debt might be too high to manage effectively.
  3. Legal Issues: Legal challenges or compliance failures can lead to financial strain, prompting liquidation.
  4. Market Changes: Significant shifts in the market or industry can make the business unviable.
  5. Director Decision: Directors might choose to liquidate if they believe the company has no profitable future.

In these cases, liquidation is used to responsibly close the business and settle its debts

How Does Liquidation Work?

Liquidation works as a structured process to close a company and settle its debts. Here’s a simple overview:

  1. Decision to Liquidate: Either the directors decide, or creditors force the company into liquidation due to unpaid debts.
  2. Appointing a Liquidator: A licensed insolvency practitioner is appointed to manage the process.
  3. Ceasing Operations: The company stops its business activities.
  4. Asset Sale: The liquidator sells the company’s assets to turn them into cash.
  5. Debt Payment: The money from asset sales is used to pay creditors.
  6. Final Steps: Any remaining tasks are completed, like final tax returns.
  7. Dissolving the Company: Once everything is settled, the company is formally dissolved and ceases to exist.

This process ensures an orderly winding up of the company’s affairs.

3 Methods of Liquidating a Company you do not Want to run Anymore

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

Creditors’ Voluntary Liquidation (CVL)

A CVL is the official term for a voluntary liquidation process used to close down an insolvent company.

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.

Compulsory liquidation

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

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.

>>Read our full article on What Happens to Directors in Liquidation?

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)

Duties of Directors during Liquidation

When a company enters liquidation, the directors’ primary responsibility shifts from promoting the company’s success to acting in the best interests of its creditors. This means ensuring that creditors are paid as much as possible and that the liquidation process is conducted efficiently and transparently.

Here are the directors’ key duties:

  1. Cease Trading: Upon realizing the company’s insolvency, directors must immediately cease trading to prevent further debt accumulation. This involves halting all business activities, including entering into new contracts, making new payments, or selling assets.
  2. Hold a Shareholder Meeting: For voluntary winding up, directors must convene a shareholder meeting to pass a resolution approving the liquidation process. This meeting provides shareholders with an opportunity to discuss and vote on the proposed course of action.
  3. Appoint an Insolvency Practitioner: Directors must appoint a licensed insolvency practitioner to oversee the liquidation process. The insolvency practitioner takes control of the company’s assets and affairs, ensuring that the company’s assets are properly disposed of and that creditors are dealt with fairly.
  4. Provide Information and Assistance: Directors must cooperate fully with the insolvency practitioner and provide them with all necessary information and assistance to facilitate the liquidation process. This includes providing financial records, company documents, and any relevant knowledge about the company’s operations and finances.
  5. Repay Overdrawn Directors’ Loan Accounts: If directors have drawn loans from the company that are outstanding at the time of liquidation, they are obligated to repay these loans to the liquidator. This ensures that creditors are prioritized over any personal financial benefits for directors.
  6. Act in the Best Interests of Creditors: Throughout the liquidation process, directors must prioritize the interests of creditors above those of shareholders or themselves. This means ensuring that creditors receive the maximum possible return on their investments and that their claims are dealt with fairly and expeditiously.
  7. Attend Creditor Meetings: If requested by the liquidator, directors are obligated to attend meetings of creditors to provide information, answer questions, and address any concerns raised by creditors.
  8. Assist in Investigations: If the liquidator deems it necessary, directors may be required to assist in investigations into the company’s affairs. This may involve providing explanations for financial transactions, answering questions about business decisions, and cooperating with any inquiries related to potential misconduct or mismanagement.

 Can My Company Continue to Trade Whilst in Liquidation?

No, your company cannot continue to trade while in liquidation. When the liquidation process starts, the company must stop all business operations. The appointed liquidator takes control of the company, and their primary task is to sell the company’s assets and use the proceeds to pay off debts. This cessation of trading is necessary to ensure the fair and orderly dissolution of the company’s affairs.

What’s the Company Liquidation Process

The liquidation process involves the winding up of a company, where its assets are sold off to pay creditors and shareholders, ultimately leading to the company’s dissolution.

The process can be broken down into several key steps:

  1. Appoint a liquidator. The liquidator is a licensed professional who will manage the liquidation process and ensure that the company’s affairs are wound up efficiently and fairly. The company’s directors can appoint the liquidator voluntarily, or the court can appoint a liquidator in the case of compulsory liquidation.
  2. Realize assets. The liquidator will identify and sell all of the company’s assets, such as property, inventory, and machinery. The liquidator may also collect outstanding debts.
  3. Pay off creditors. The liquidator will use the proceeds from the sale of assets to pay off the company’s creditors, in order of priority. Secured creditors, such as banks, have the highest priority.
  4. Distribute remaining assets. Once all of the creditors have been paid, the liquidator will distribute any remaining assets to the company’s shareholders.
  5. Close the company. Once all of the creditors have been paid and the remaining assets have been distributed, the liquidator will close the company. The company will be struck off the register of companies and will cease to exist as a legal entity.
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Company Liquidation Advice

If you’re thinking about closing your company, it’s really important to get advice from people who know what they’re talking about. One good option is to talk to insolvency practitioners. They are experts in helping companies close in the right way. At Company Debt, we have licensed experts you can talk to. You can chat with them online, call them, or even meet them face-to-face.

You can also talk to lawyers who know a lot about company law and closing a company. They can tell you what the law says you have to do and what could happen if things go wrong.

Financial advisors are another option. They can look at your company’s money situation and help you understand what will happen if you close the company.

Finally, some business groups and trade organizations offer advice or can put you in touch with experts who can help.

It’s a good idea to talk to more than one expert to make sure you’re getting the full picture.

What Happens to Company Assets and Debts in Liquidation?

When a company enters liquidation, the appointed liquidator takes control of all assets belonging to the company. These assets are sold off through different means like auctions or negotiated sales to other corporations and investors.

Any proceeds obtained from the asset sales go into a liquidation account. This account is used by the liquidator to pay off any fees, creditors, and shareholders in order of priority.

Who Gets Paid First in Liquidation?

  • Secured creditors who have claims over specific assets will get first priority in repayment from the sale proceeds of those assets.
  • Next in line are preferential creditors like employees who are owed wages and benefits.
  • Unsecured creditors are the last priority and often do not recoup their full debts.

Once all creditor claims are resolved, any remaining sale proceeds are distributed to the company shareholders.

However, shareholders typically receive these leftover funds only if substantial value was recovered from the asset sales. In addition to asset sales, the liquidator will notify all creditors of the liquidation and make efforts to collect any outstanding debts owed to the company.

If those recovery efforts are insufficient, personal guarantees by company directors may be invoked to pay off amounts still owed to creditors after the asset liquidation.

Overall, the liquidation process aims to generate maximum value from asset sales and distribute the proceeds to creditors based on priority ranking. Shareholders receive whatever leftover funds remain only after all company debts and liquidation costs are fully paid.

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Employee Rights and Redundancies During Company Liquidation

When a company goes into liquidation, its employees have certain rights that directors must respect. These rights include:

  • Consultation: If redundancies are likely, directors must consult with employee representatives about the proposed redundancies and the selection criteria. This consultation must be meaningful and take place before any decisions are made.
  • Notice: Employees are generally entitled to a notice period before they are made redundant. The length of the notice period depends on the employee’s contract of employment and their years of service.
  • Redundancy pay: Employees who have been with the company for at least two years are usually entitled to statutory redundancy pay. This is calculated based on the employee’s age, years of service, and weekly pay.
  • Unpaid wages and other benefits: Directors must pay employees any unpaid wages, holiday pay, or other benefits that they are owed. These debts are considered to be preferential creditors, meaning that they will be paid before other unsecured debts.
  • Pension contributions: If the company has a pension scheme, directors must inform the Pension Protection Fund and take steps to secure the pensions of their employees.

Directors must also provide the Insolvency Practitioner with detailed employee records, such as employment contracts, payslips, and holiday records. These records are essential for the IP to be able to calculate and pay redundancy payments and other entitlements.

How long does the liquidation process 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

What happens after Liquidation?

After liquidation, the following steps occur:

  1. Asset Distribution: Proceeds from the sale of the company’s assets are used to pay creditors.
  2. Final Accounts and Reports: The liquidator prepares final accounts and a report on the liquidation.
  3. Paying Creditors: After selling assets, creditors are paid in a legally defined order.
  4. Deregistration: The company is formally removed from the Companies House register.
  5. Closure: The company legally ceases to exist after deregistration.

The liquidation process ensures all legal and financial obligations are met before the company is dissolved.

Risks of Company Liquidation

Liquidating a company comes with several downsides that can have lasting impacts:

  1. Asset Loss: Any assets owned by the company are sold off to repay creditors. If the assets are insufficient, you may not recover any investment you made into the company.
  2. Personal Liability: If you’ve signed a Personal Guarantee, liquidation could trigger this, making you personally responsible for the company’s debts.
  3. Credit Damage: Both the company’s and potentially the directors’ credit ratings may suffer, hindering future borrowing opportunities.
  4. Unpaid Debts: Suppliers, vendors, and other parties you owe money to may not get fully paid, which could damage your reputation and professional relationships.
  5. Employee Redundancy: Staff will lose their jobs, which, besides the emotional toll, could lead to legal obligations like redundancy payments, which the company may not be able to afford.
  6. Legal Consequences: Directors could face legal action if found guilty of wrongful trading or other misconduct, potentially resulting in disqualification or personal liability for company debts.
  7. Closure Costs: Liquidation isn’t free. You’ll need to pay for the services of an Insolvency Practitioner, and these costs can be substantial, especially if the company has no assets.
  8. Emotional Impact: The process can be stressful and emotionally draining for all involved, including directors, employees, and stakeholders.
  9. Finality: Once liquidated, the company ceases to exist. Any future business potential is lost, and you’ll have to start anew if you decide to go back into business.

How to Liquidate a Company

To start liquidating your company, first, talk to a financial expert or insolvency practitioner to understand your options. Then, as a director, you need to agree on this decision with other directors and get approval from shareholders. After that, appoint a licensed insolvency practitioner to manage the liquidation.

If you’re unsure about any of these steps or need more guidance, we at Company Debt are here to help. Get in touch with us via live chat, telephone, or email for expert advice and support through this process.

Company Liquidation FAQs

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 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.