Should I Liquidate my Company

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, the decision to do this rests upon whether the company remains viable or whether you feel its debts are now unsustainable.

You may also wish to liquidate as a tax-efficient means of closing a solvent company with assets.

At Company Debt, we offer expert guidance and financial advice to help your business, whether insolvent or solvent, through liquidation. Our team is committed to providing you with the necessary support and information to understand your options as clearly as possible.

Liquidation; explained for directors, by insolvency practitioners

What Does Liquidation Mean?

Liquidation refers to the process of closing a business by converting its assets into cash. 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. Any money left goes to shareholders.

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

What Happens if You Liquidate a Company?

The liquidator assumes control over the company, effectively ending the directors’ authority. They manage the sale of the company’s assets, and after settling the liquidation costs and expenses, they distribute any leftover funds to the creditors.

What are the Options for Liquidating My Company?

There are several ways to liquidate, depending on whether your company can pay its debts or not.

If your company is solvent and can pay its debts, you might consider a Members’ Voluntary Liquidation. This process requires the directors to declare that the company can pay its debts and involves appointing an insolvency practitioner to handle the liquidation.

For companies that cannot pay their debts, a Creditors’ Voluntary Liquidation is an option. This involves the directors choosing to liquidate, with the process overseen by creditors and a liquidator who manages the sale of assets and payment of debts.

How do I Liquidate my Limited Company?

Once the decision to liquidate a limited company has been firmly made by the directors, they must initiate the process by convening a formal board meeting. At this meeting, a resolution to liquidate the company should be passed and recorded.

The next critical action is to arrange a General Meeting of the shareholders. In this meeting, the shareholders need to pass a resolution to liquidate the company. For a Creditors’ Voluntary Liquidation (CVL), a 75% majority vote is required, whereas, for a Members’ Voluntary Liquidation (MVL), a simple majority will suffice.

Following the shareholders’ approval, the directors must appoint a licensed insolvency practitioner (IP) to oversee the liquidation process. The directors’ responsibility at this stage includes providing the IP with comprehensive and accurate information about the company’s financial position, assets, liabilities, and any other relevant details.

After appointing the IP, the directors’ direct involvement in managing the company’s affairs significantly reduces. Their primary role becomes assisting the IP as needed by supplying information and responding to queries, ensuring that the liquidation process is executed effectively and in accordance with legal requirements.

3 Processes to Liquidate 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 an 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)

 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.

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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 I have liquidated my company?

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.