If your company is insolvent and you’re considering liquidation, it’s crucial to understand the process so you can make the right decisions and get on with your life. Liquidation is the process of bringing a company’s life to an end, selling off its assets to pay creditors, and ultimately dissolving the business. As a director, your actions during this time are critical. The faster you get your paperwork in order and act responsibly, the quicker and smoother the process will be.
What is Liquidation?
There are two primary types of insolvent liquidation: voluntary and compulsory. The main difference is whether you, as a director, decide to put the company into liquidation yourself, or if it is forced upon you by creditors.
Creditors Voluntary Liquidation (CVL)
A CVL is the most common form of liquidation where directors take the initiative. It’s a formal process that begins when the majority of the company’s board signs a resolution to liquidate. Shareholders then hold a general meeting to approve this decision, with 75% approval required. This process can be handled in two main ways:
Deemed Consent: This is the most common method, used in over 95% of all liquidations. A date is set for creditors to object to the appointment of the liquidator or request a meeting. If no objections are received by the specified date, the liquidator is appointed without a physical or virtual meeting.
Creditors’ Meeting: A physical or virtual meeting is held for larger and more complex liquidations. Here, creditors can formally vote on the appointment of the liquidator.
Compulsory Liquidation
This is the least favourable option. It is a slower process where the company has no control over the sale of its assets. The process begins when a creditor serves a statutory demand, giving the company 21 days to pay. If the debt is not paid or a dispute is not raised, the creditor can apply to the court for a winding-up hearing. If the court grants a winding-up order, a government-appointed Official Receiver takes control of the company. A significant disadvantage of this route is that the director loses all control, and the Official Receiver’s fees and expenses will reduce the funds available to creditors.
How Long Does It Take?
The time it takes to liquidate a company varies based on its complexity, but the initial appointment of a liquidator usually takes between one and two weeks. The minimum statutory notice for creditors is seven days. The full process, from beginning to end, typically takes between six and 24 months. The larger and more complex the liquidation—due to asset sales, investigations, and agreeing creditor claims—the longer it will take. There is no legal time limit, and some complex cases can take longer than two years. At the end of the process, the liquidator will send a final report to creditors after completing their investigations.
A Director’s Role and Risks
Directors who continue to trade a company whilst insolvent may face serious penalties, including disqualification under the Company Directors Disqualification Act 1986. The main provisions of the Insolvency Act 1986 you should be aware of are:
Wrongful trading:
Continuing to trade when you knew or should have known the company had no reasonable prospect of avoiding insolvent liquidation.
Transaction at an undervalue:
Selling assets for less than they are worth.
Preferences:
Favouring one creditor over others.
To protect yourself and avoid personal liability, it is critical to act reasonably, responsibly, and within the law. Your duty is to act in the best interest of creditors and not make the situation worse. We recommend the following steps:
- Maintain up-to-date management accounts and a daily cash flow model.
- Hold regular, minuted board meetings to discuss the company’s financial position and decisions.
- Seek professional advice from a licensed insolvency practitioner as soon as you suspect the company is insolvent.
If you have acted properly and responsibly, the process is not as daunting as it may seem. You may be able to claim redundancy from the government just like any other employee, and you can then move on to your next venture. However, if you have not acted properly, the liquidator will make a report to the Insolvency Service, which could lead to an investigation and the risk of being held personally liable for the company’s debts.
