How Much Does Liquidation Cost?

If your business is insolvent and you feel that it’s no longer viable now or in the future, one option available to you is to enter into a voluntary liquidation. The first step of this process, known as a creditors’ voluntary liquidation or CVL, is the appointment of a licensed insolvency practitioner. They will be responsible for identifying, valuing and selling the company’s assets and distributing the proceeds to the company’s creditors before closing the business down.

This process can be appealing for company directors because it prioritises the interests of the creditors and reduces the risk of allegations of wrongful trading or misconduct against the company directors.

Here’s a guide to help you better understand the costs of liquidation.

The Costs of Liquidation

Voluntary vs. Compulsory Liquidation

The only alternative to a voluntary liquidation to close down an insolvent business is to wait to be forced into compulsory liquidation by a creditor, which is often HMRC. Initially, the fees that need to be paid for a voluntary liquidation may make this approach more attractive. However, waiting for the company to be forced into liquidation is extremely risky as it increases the likelihood that the company could continue to trade while insolvent. That’s against the law and could lead to the company director(s) being made personally liable for the business’s debts.

Taking the voluntary liquidation route shows that you are making the interests of creditors your priority (something insolvent businesses must do) and reduces the risk that accusations will be made against you. It also puts the directors of the business in control of the process by allowing you to appoint your own liquidator and place the company into liquidation at a time that suits you.  

What are the Costs of Voluntary Liquidation?

The cost of a voluntary liquidation varies depending on the size of the business and the complexity and time it takes to wind up. However, for small limited companies with relatively few assets, costs typically range from £4,000-£6,000 plus VAT. That covers the cost of hiring an insolvency practitioner to act as the liquidator, calling the creditors’ meeting and preparing the statement of affairs and section 98 reports.

There are also further liquidation costs as the process progresses for duties that may include:

  • Advising directors of their duties
  • Making redundancies and processing employees’ claims
  • Settling outstanding disputes and contracts
  • Collecting money owed to the company
  • Informing the relevant authorities such as HMRC, Companies House and the Insolvency Service
  • Investigating transactions in the period leading up to the liquidation
  • Valuing and realising the assets

How Can the Costs of Liquidation be Paid?

One concern you’ll undoubtedly have as the director of an insolvent business is how the liquidation costs will be paid. There are three different ways the cost of voluntary liquidation can be covered:

(1) Through the sale of company assets

One of the liquidator’s main roles is to sell the company’s assets and any work in progress following a valuation by a RICS chartered surveyor. The costs of the liquidation can be met by these sales. If the sale does not cover all of the liquidator’s costs then some of the money held on account can also be used.

(2) From the company director’s redundancy pay

Not many people know that directors of limited companies that enter liquidation may be entitled to redundancy pay. The average sum paid for director redundancy is around £12,000, some of which could be used to cover the liquidation costs. You must meet the following criteria to qualify for director’s redundancy pay:

  • Have worked under a contract of employment for the company continuously for at least two years (that contract can be written, oral or implied)
  • Have worked a minimum of 16 hours a week

If you do not qualify for director’s redundancy pay and the sale of assets does not cover the cost of liquidation, you may be left with no choice other than to pay using funds held personally. It is not uncommon for directors to use personal savings or pay for the liquidation with a credit card or personal loan. Although that might sound drastic, it’s often worth it to avoid the stress and potential repercussions of a compulsory liquidation.

Receive Expert, No-obligation Advice from our Team

If you’d like to know more about the cost of liquidation or want to discuss any other matter related to company debts or insolvency, please do not hesitate to get in touch with our team.  

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