What Happens if a Company Goes into Liquidation?
Whether you’re considering putting your own company into liquidation, or are an interested party involved with a business that is going into liquidation, this article will explain the meaning, the process, and the implications.
Going into Liquidation: What Does it Mean?
When a company has debts which outweigh its assets, or when it’s bills exceed available cashflow, it is insolvent.
One thing many directors don’t realise is that at the moment of insolvency, a profound shift happens to their role. In an instant, the responsibility to shareholders disappears and the primary responsibility is now to your creditors.
To that end, trading out of insolvency isn’t an option. You have to stop what you’re doing, and make contact with an insolvency practitioner.
It may well be you can rescue the company via a process known as company voluntary arrangement, or administration. If it’s concluded that those things aren’t possible, then the company goes into liquidation.
This means it is closed down, its assets sold and the money used to pay creditors, and finally is is struck off the register at Companies House.
What Does it Mean for Directors When a Company Goes into Liquidation?
Liquidation will mean directors powers will cease. While they will be required to cooperate with the insolvency practitioner, providing records and information so that the IP can compile a Statement of Affairs for creditors, their primary role is now finished.
At the end of the liquidation, the director wil be free to start another company, or take another directorship appointment.
Do Employees get Paid When a Company Goes into Liquidation?
When a company goes into liquidation its employees become creditors, along with anyone else the company owes money to.
The job of the insolvency practitioner is to sell any company assets and use the money to pay creditors, in order of priority. Employees become what are known as ‘preferential creditors’ meaning they’re near the front of the queue when it comes to getting paid.
The legislation around this, the Insolvency Act 1986, clarifies that employees:
- are entitled to their outstanding salary, if funds are available
- this includes earned commission (for a maximum of 4 monthspreceding the insolvency, and up to a ceiling of £800)
- are entitled to holiday pay of up to 6 weeks
- certain pension payments
If employees are owed money exceeding these statutory amounts, those sums then become ‘ordinary debt’ meaning it is lumped along with all the other creditors. Obviously, this means they are less likely to receive the full amount owed to them.
For sums not covered by the insolvent companies assets, the government run Redundancy Payment scheme covers certain amounts of salary, notice, holiday and redundancy pay.
When a Company Goes Into Liquidation who Gets Paid First?
- Secured Creditors – Banks or Financial instutions with a legal charge of a company asset
- Preferential Creditors – These include employees, HMRC,
- Unsecured Creditors – anyone who has lent the company money without security. Salary or wages for directors,