What Does it Mean to Liquidate Assets from a Business?
When a business faces financial difficulties and cannot pay its bills, it may need to liquidate some of its assets. This means selling assets to generate cash.
A business owner might sell non-essential assets to raise working capital. However, if the business is already insolvent, selling assets can be risky. It’s crucial to ensure the sale amount is justified and to be cautious when selling to anyone connected to the directors or the business.
Before deciding to liquidate assets, especially in financial trouble, it’s advisable to seek professional help. Our team is experienced in assisting small businesses facing difficulties, so please contact us for support.
What’s the Process of Asset Liquidation?
The method used by the insolvency practitioner to liquidate a business’s assets can differ depending on several factors. These include the type of assets involved, the urgency with which the funds are needed, and the type of liquidation process.
If there’s no particular rush for the assets to be realised, they will usually be sold for a higher price on the open market. However, an auction may be more appropriate for specialist assets or if the funds are needed more urgently. Whatever the method of sale, the assets will always be professionally valued to get the best possible return for the creditors.
Liquidating Assets as a Result of Insolvency
When a business becomes insolvent, it must act in the best interests of its creditors. Often, the best way to maximise the return for creditors is to close the business and liquidate its assets through a process called ‘liquidation.’
An insolvency practitioner (IP) is appointed to oversee the liquidation process. The IP is responsible for valuing the business’s assets, ensuring they are sold at fair market value, and distributing the proceeds in accordance with legal priorities.
All assets must be independently valued to ensure a fair sale price. This valuation includes plant and machinery, property, vehicles, fixtures, and fittings. An accurate valuation prevents assets from being sold at an undervalue, which could disadvantage creditors.
Order of Priority:
The proceeds from asset sales are distributed in a strict order of priority as dictated by law:
Secured Creditors: Creditors with security over the company’s assets are paid first.
Preferential Creditors: This includes certain employee claims such as unpaid wages and holiday pay.
Unsecured Creditors: Once secured and preferential creditors are paid, any remaining funds are distributed to unsecured creditors.
Shareholders: Any money left after all creditors have been repaid is distributed to the shareholders.
Risks and Considerations
When liquidating business assets, especially in financial distress, it’s crucial to be aware of the following risks:
Undervaluation: Selling assets below their market value can lead to scrutiny by Insolvency Practitioners (IPs). Transactions at undervalue can be reversed, leading to potential legal consequences for directors.
Failure to comply with legal requirements, particularly during insolvency, can result in severe penalties and accusations of wrongful trading or asset stripping. Adhering to the Insolvency Act 1986 and other relevant regulations is essential.
Stakeholder Objections: Stakeholders, including creditors, employees, and investors, may object to asset sales. Transparent communication and addressing their concerns proactively can prevent disputes and maintain trust.
Conflicts of Interest: Transactions involving related parties, such as directors or family members, are subject to heightened scrutiny. Ensuring these transactions are at fair market value and well-documented is critical.
Personal Liability: Directors may face personal liability if asset sales are deemed unfair to creditors. This can include being held personally responsible for company debts and facing legal actions.
Fraudulent Transfers: Moving assets to evade creditors is considered fraud and can result in severe legal repercussions, including personal liability and potential criminal charges.
Need Advice on Liquidating Assets?
Whether you’d like to know more about liquidating assets or want to discuss the liquidation process in more detail, we are on hand to help. We’ll explain your options and make sure you understand the implications of each procedure for you and your business. Get in touch for your free, no-obligation consultation today.
FAQs on Liquidating Assets
Who owns the assets of a liquidated company?
Upon entering liquidation, the assets of a company are effectively under the control of the liquidator for the purpose of liquidation, but they legally belong to the company’s creditors. The liquidator acts on behalf of the creditors to realise the assets, meaning to convert them into cash, which is then used to repay debts in order of priority established by insolvency law.
What types of assets are typically liquidated first in the UK?
In the UK, assets that can be quickly and easily converted into cash, such as inventory, marketable securities, and accounts receivable, are typically liquidated first. Fixed assets like property, plant, and equipment are also sold, but these may require more time to find buyers willing to pay a fair market value.
How are creditors prioritised during asset liquidation in the UK?
Creditors are paid in a legally defined order. Secured creditors, who have loans backed by collateral, are prioritised first. They are followed by preferential creditors, including employees for certain entitlements like unpaid wages and holiday pay, up to a statutory limit. Unsecured creditors are next in line, and if any funds remain after these creditors are paid, they may be distributed to shareholders.
What happens if the liquidated assets do not cover all debts in the UK?
If the sale of liquidated assets doesn’t generate enough money to cover all the company’s debts, the debts are paid in the priority order until the funds run out. Secured creditors may recover a portion of their loans, but unsecured creditors and shareholders risk receiving little to no repayment.
Is it possible to buy back assets from a liquidated company in the UK?
Yes, it is possible for directors, employees, or third parties to purchase assets from a liquidated company. These sales are carefully monitored to ensure they are conducted at fair market value and in the creditors’ best interest. Transactions are often scrutinised to prevent undervaluation or preferential treatment.
