Whether you’re considering putting your company into liquidation, or are an interested party involved with a business that is insolvent, this article will explain the meaning, the process, and the implications.
For the purposes of this article, we’ll assume that we are referring to insolvent liquidation (as opposed to the process used for a solvent company known as members’ voluntary liquidation.)
Companies are either forced into insolvent liquidation this on a compulsory basis or choose it voluntarily based on mounting debt.
Read on to learn more about the process, the things you should be aware of as a company director, and the potential risks.
‘Company Goes into Liquidation’ Meaning
When a limited company has debts which outweigh its assets, or when it’s bills exceed available cashflow, it is legally 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.
It may well be you can rescue the limited 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.
This entire process, from the moment of insolvency to the final dissolution of the company is known as ‘going into liquidation.’
While it may feel intmidating and stressful, it can also be fast, efficient and a huge relief to finally put a business behind you with this straightforward process.
Voluntary Liquidation Process in the UK
The correct term for the process known as creditors’ voluntary liquidation is as follows:
- Contact an insolvency practitioner such as ourselves for a free consultation
- Director proposes an Extraordinary Resolution to Wind Up to the shareholders, the necessary precursor to choosing a voluntary liquidation
- Once appointed liquidator assumes responsibility for creditor communication, directors powers cease
- We prepares a Statement of Affairs document with the help of directors summarising the company situation and the likely returns from liquidation
- Liquidator sells (‘realises’) company assets in order to give creditors the best possible return
- When the process is complete, the company is struck off the register at Companies House meaning it ceases to exist, as do its debts.
- Directors are free to begin a new business, or seek another directorship.
Compulsory Liquidation Process
- Company receives a final demand letter known as a Winding up Petition
- Debtor has 7 days to respond
- After 7 days the petitiion is advertised in the Gazette meaning bank accounts will be automatically frozen
- If the situation remains unresolved, directors will be expected in Court at the appointed hearing date
- At the Winding up Hearing the judge will rule upon the case. If the debtor is ruled against the company will be compulsorily liquidated via a ‘Winding up Order.’
- Official Receiver (court appointed liquidator) is appointed with the task of selling (‘realising’) company assets to maximise creditor return.
- At the end of the process the company is dissolved.
In both insolvent liquidation processes liquidator’s have a mandate to investigate the actions of company directors in the period preceding insolvency, for evidence of misfeasance such as wrongful trading.
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.
From the moment the liquidation begins, directors will cease being responsible for the company’s affairs, including having to deal with creditors. For many this is a profound relief, as the insolvency practitioner will take over all communication from this point on.
Directors are not personally liable for corporate debt unless there is evidence of misfeasance, or where a personal guarantee document has been signed.
What Happens to Employees 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 the following employee entitlements:
- are entitled to their unpaid wages, 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.
What Happens to Shareholders When a Company is Liquidated?
Shareholders become unsecured creditors, during an insolvent liquidation, which means they’re right at the bottom of the list when it comes to getting paid. Typically shareolders are unlikely to get anything when a company is liquidated.
Yes, both employees and directors may be eligible to statutory redundancy based on certain criteria. We cover this in greater detail in our article on employee rights in insolvency.
It is less well known that directors may also be eligible for redundancy payments. Find out more about this process here.
Almost all business contracts contain a standard clause which specifies that the contract ceases if the company enters liquidation.
You should investigate the specific contracts you have in place to clarify what is stated around insolvency events.
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,