What is the definition of the term ‘liquidation‘ ?
As licensed insolvency practitioners who’ve helped thousands of businesses through the process, we’re well placed to answer this question.
In the following article we’ll explore the definition and ramifications of liquidation for all concerned.
What Does Liquidation Mean?
Many business owners have no call to understand what liquidation is until it’s too late.
Put simply, ‘liquidation in business refers to the process by which a company that has reached the end of its life is formally closed down and its assets realised (converted into cash).
This usually comes about because a company cannot pay its debts when they fall due, or when it’s liabilities exceed its assets.
Although the term liquidation is more commonly use in the context of insolvent companies, it may also be used in the context of solvent ones.
What does Liquidation Mean for Company Directors?
For directors, liquidation means that a licensed insolvency practitioner will be formally appointed to close down the company, at which point directors powers cease.
From this point on directors must cooperate with the liquidator so that he/she can understand the situation to the best of their ability.
Official Receiver Investigation into Directorial Conduct
There will also be an investigation into director’s behaviour during the period preceding insolvency.
If directors are found to have prioritised personal interests of those of the creditors, once the point of insolvency had been reached, they may be held liable for charges of wrongful or fraudulent trading.
What Does Liquidation Mean for Company Shareholders?
Once the insolvent company has gone into liquidation, the insolvency practitioner’s primary task is to pay creditors what they are owed from any monies realised. Shareholders will receive nothing until the creditors have been paid, and there is no law requiring the liquidator to keep them informed on the progress or outcome.
Where a shareholder has partly paid or unpaid shares in the limited company, the insolvency practitioner has the right to call upon them for payment.
At the end of the liquidation, and if the liquidator states that the sharedholders will not receive any money from the asset realisation, shareholders have the right to register a capital loss.
What Does Liquidation Mean for Employees?
If a company goes into liquidation, it stops trading immediately, and will eventually be struck off the register at Companies House and cease being a company altogether. In this situation, employees will lose their jobs, but can claim some relief via the governments Fair Entitlements Guarantee (FEG) scheme. This includes:
- Up to 13 weeks pay arrears
- Holiday Pay
- Redundancy pay (up to 4 weeks per year of service with the company)
- A maximum of 5 weeks pay in lieu of termination
- Long Service Leave
Read our full article here on Employee Rights during Liquidation.
What Does Liquidation Mean from the Perspective of Companies House?
Once a liquidator has realised the company assets and distributed proceeds to creditors, the company is then dissolved and ceases to exist. Companies House will strike the company off the register, meaning it has no legal existence.
What Does Liquidation Mean in Accounting?
Within accountancy, liquidation is understood as realising the assets of a company for the benefit of creditors, before paying shareholders what remains. The order of preference for who gets paid is known as the ‘priority of claims.’