How to Liquidate a Company: A Step-by-Step Guide for Directors
Liquidating your company, also known as ‘winding up,’ means officially closing a business, disposing of any assets, and removing it from the official register at Companies House.
Liquidation means turning all assets into cash so the company can be closed.
It is an option for both solvent and insolvent companies, though the processes differ depending on the company’s situation.
Read our complete guide to the process of company liquidation below.
Three Liquidation Methods
There are three ways a limited company can be liquidated, each appropriate for a particular situation.
Below we’ll explore the three different types of business liquidation:
(1) Liquidate a Company with a ‘CVL’
Voluntary liquidation of an insolvent company, also known as “creditors’ voluntary liquidation,” is a process by which a company in the United Kingdom that cannot pay its debts is closed down.
This process is typically initiated by the directors and shareholders of the company, who decide that the best course of action is to liquidate the company’s assets and distribute the proceeds to its creditors.
Directors appoint an insolvency practitioner as company liquidator to oversee the process and ensure that the assets are sold. The proceeds are distributed fairly and in accordance with UK law.
In a voluntary liquidation of an insolvent company, the liquidator will also investigate the company’s financial affairs to determine the cause of the insolvency and whether any wrongdoing has occurred. This process can provide closure for the company and its creditors and help resolve the company’s financial issues in an orderly manner.
» MORE Read our full article on a CVL
(2) Compulsory Liquidation
Compulsory liquidation of an insolvent company, begun by a “winding-up order,” is a process by which the court can dissolve a company in the United Kingdom that cannot pay its debts.
This process is typically initiated by a creditor of the company, who petitions the court for a winding-up order because the limited company is insolvent and unable to pay its debts.
If the court grants the winding-up order, an official receiver is appointed as the liquidator to oversee the process and ensure that the company’s assets are sold. The proceeds are then distributed fairly and in accordance with UK law.
In a compulsory liquidation of an insolvent company, the official receiver will also investigate the company’s financial affairs to determine the cause of the insolvency and whether any wrongdoing has occurred. This process can provide closure for the company and its creditors and help resolve the company’s financial issues in an orderly manner.
» MORE Read our full article on Compulsory Liquidation
(3) Liquidate a Company with an ‘MVL.’
Members’ voluntary liquidation, also known as “solvent liquidation,” is a tax-efficient process by which a company in the United Kingdom that is solvent or able to pay its debts can be dissolved voluntarily by its shareholders.
This process is typically initiated when the directors and shareholders decide that the company is no longer needed or desired, and the best course of action is to liquidate the company’s assets and distribute the proceeds to its shareholders.
In an MVL, an insolvency practitioner is appointed as the liquidator to oversee the process and ensure that the assets are sold, and the proceeds are distributed fairly and in accordance with UK law.
This process can be an effective way for a company to wind down its operations and resolve its financial affairs in an orderly manner.
» MORE Read our full article on MVL
Step-by-Step Guide: How to Liquidate a Company
The following are the key steps in the voluntary liquidation of an insolvent company.
(1) Appointing a liquidator – The directors must appoint a liquidator to oversee the liquidation process. The liquidator must be a licensed insolvency practitioner who collects and sells the company’s assets, pays the company’s debts, and distributes any remaining assets to the shareholders.
(2) Meeting of directors – It is up to the company directors to begin the liquidation procedure via a Special Resolution to Wind Up.
(3) Hold a shareholders meeting – The directors must convene a general shareholders meeting and put the resolution to liquidate the company to a vote. A 75% majority of the shareholders must pass the resolution at the meeting or by proxy.
(4) Notify Companies House and other relevant parties -The Insolvency Practitioner must notify the Companies House of the decision to liquidate the company and appoint a liquidator. They must also inform the company’s creditors, employees, and other relevant parties, such as the company’s bankers and insurers.
(5) Prepare a statement of affairs – The liquidator will prepare a detailed report on the company’s assets and liabilities. This statement must be presented at a meeting of creditors, which must be held within eight weeks of the appointment of the liquidator.
(6) Realize the company’s assets – The liquidator must collect and sell the company’s assets, such as property, plant and equipment, and inventory. The assets’ proceeds must be used to pay the company’s debts.
(7) Pay the company’s debts – The liquidator must pay the company’s debts in the following order of priority:
- Costs and expenses of the liquidation
- Claims by secured creditors
- Claims by preferential creditors (e.g., employees)
- Claims by unsecured creditors
Any remaining assets are distributed to the shareholders.
(8)Investigating the company’s affairs: The liquidator will investigate the company’s financial affairs to ensure that all assets have been identified and all debts have been paid.
(9) Dissolving the company: Once all assets have been distributed and debts have been paid, the liquidator will apply to dissolve the company.
(10) Filing final report and accounts: The liquidator will file a final report and accounts with the relevant authorities, detailing the steps taken during the liquidation process and the outcome.
Director’s Duties: What You Need to Know During the Company Liquidation Process
When a company is liquidated in the United Kingdom, the director’s role and responsibilities will change significantly.
After the directors’ powers cease, they will typically be required to assist the liquidator in winding up the company’s affairs.
This assistance may involve providing information and documents and cooperating with the liquidator undertaking the sale of the company’s assets.
The director’s powers and responsibilities come to an end during the liquidation process. Directors will no longer have the authority to make decisions on behalf of the company or to enter into new contracts on its behalf. Instead, they will be required to follow the instructions of the liquidator.
If the company is being liquidated due to financial distress or insolvency, the director may also be held personally liable for the company’s debts or for any wrongdoing or mismanagement that contributed to the company’s financial problems.
In such cases, the director may be required to compensate the company’s creditors out of their own assets or may face legal action.
» MORE Read our full article on What Happens to Directors During Liquidation
Liquidating Your Own Company: Is it Possible?
You can’t liquidate a company yourself: all liquidations require the services of a licensed insolvency practitioner.
IPs are required to ensure transparency and fairness for creditors.
In most cases, the fees for the liquidator can be taken from the sale of corporate assets. Directors may have to find the funds personally if this isn’t sufficient.
Protecting Yourself as a Director in a Company Liquidation
Directors considering liquidation should be aware that the liquidator has a duty to examine the behaviour of the directors in the period preceding insolvency.
The Insolvency Practitioner will seek evidence of directorial misconduct, principally wrongful trading. Evidence of this can lead to a director’s disqualification order and a ban from serving as a director for 15 years.
Consulting with a qualified insolvency practitioner at an early stage is the safest way to understand your situation and protect your interests. Choosing voluntary liquidation within your own timeframe is preferable to being forced into compulsory liquidation via a Winding Up Order.
How Much Will it Cost to Liquidate my Company?
Liquidation costs will depend on the size of the company, its debts, and the case’s complexity. For a smaller company with minimal or no assets, costs begin at around £4000.
For larger companies with more assets to realize, the costs will be higher as it takes far longer for the insolvency practitioner to complete the work. In certain situations, it is possible to fund liquidations via directors’ redundancy pay, assuming the eligibility criteria are met.
After Liquidation: What Happens Next and How to Move Forward
Once the liquidation process is complete, the company will be struck off the register at Companies House and cease to exist.
Directors will be free to start another company or seek employment elsewhere. This is assuming there has been no disqualification order due to misconduct.
Our Company Liquidation Services: Expert Assistance Every Step of the Way
Our team of professional fully-accredited insolvency practitioners have over 100 years of combined experience in helping businesses and individuals resolve financial challenges.
We offer a free, one-hour confidential consultation for all inquiries via phone, video call or in person. Our team consists of fully qualified IPs, Chartered Tax Advisers, and Accountants.
Our quick response times and track record of success in various sectors make us the ideal choice for those needing financial guidance. Based in North London, we serve clients throughout England, Scotland and Wales.
Considerations and Challenges: Key Factors to Keep in Mind When Liquidating Your Company
There are several vital things that directors should know about a company liquidation:
- The legal process: Directors should understand the legal process for liquidating a company, including the requirements for appointing a liquidator and the steps involved in selling the company’s assets and paying off its debts.
- The impact on stakeholders: Directors should be aware of the impact liquidation will have on stakeholders, including shareholders, employees, creditors, and customers. They should consider how to communicate the decision to liquidate and minimize the impact on these parties.
- The financial implications: Directors should be aware of the financial consequences of liquidation, including the potential cost of the process and the distribution of any remaining funds to shareholders.
- The potential consequences: Directors should be aware of the potential implications of liquidating a company, including the impact on their personal finances and reputation and the potential legal implications.
- The alternatives to liquidation: Directors should consider whether there are any alternatives to liquidating the company, such as restructuring or seeking investment, and carefully weigh the pros and cons of each option.
FAQs
UK law requires that only a licensed insolvency practitioner liquidate a company, whether solvent or insolvent.
How do I appoint a liquidator?
A company usually finds a liquidator through a Google search or an accountant’s recommendation. This liquidator usually stands unless the creditors, at a later date, nominate a different insolvency practitioner.
How much does it cost to liquidate a company?
Every firm will charge its own fee for liquidation, there is no set cost. We charge £4000-7000, on average, to liquidate a small business in the UK.
Is it free to liquidate a company?
There are no fees charged by the government or other regulatory bodies to liquidate a company. However, the process of liquidating a company comes with a legal requirement to use insolvency practitioners, who charge fees for their services.
How long does the liquidation process take?
The length of the liquidation process can vary depending on the size and complexity of the company, the number and nature of assets, and the number of creditors. One year is an average timeframe.
What happens to the company’s assets and debts during liquidation
The company’s assets will be sold to pay creditors during the liquidation process. All the debts (save those personally guaranteed) will end with the dissolution of the company itself.
