There Are Three Types of Company Liquidation
- Compulsory Liquidation
- Members Voluntary Liquidation
- Creditors Voluntary Liquidation
Company liquidation is when a company’s assets are turned into cash. In the case of an insolvent company the proceeds are used to pay back any creditors. If the company is not insolvent then the proceeds are distributed to members and shareholders. We discuss here the process of company liquidation.
The Creditors Voluntary Liquidation Process
The liquidation begins when the shareholders vote to liquidate the company and appoint a liquidator. Until that resolution passes, the director controls the company. There are a few formalities to complete before liquidation.
- Directors convene to discuss the company’s finances and agree to liquidate. A shareholders’ meeting is held to explore winding up the company. The Company’s Memorandum and Articles of Association require written notification to shareholders of the General Meeting (usually 14 or 21 days). In some cases, the meeting may be early.
- The director must confirm the appointment of a liquidator by a Decision Making Process (DMP), this is usually via a “virtual” meeting of creditors under the Insolvency Act 1986. (as amended). A Director must chair the virtual meeting. Creditors normally gather on the same day just after shareholders. All creditors must be mailed notice of the DMP, and the director must give a thorough list of known and probable creditors. This meeting will be held “virtually” by telephone conference unless creditors prefer differently, but you as director must be available to attend if they do.
- Before the DMP date, the director prepares the following information for creditors ahead of any creditors’ meeting:
a) Statement of Affairs summarising assets and liabilities. The director, must sign this statement before ending the meeting.
b) A company history and failure report
c) Statutory and financial information summary. - The liquidator will prepare the appropriate notices and help the directors prepare the above material. The liquidator will require the Company’s previous annual accounts and recent management/draft accounts. All known creditors should be listed. This must be done 7 days before the shareholders’ meeting.
- At the shareholder’s meeting a liquidator is appointed. The resolution to liquidate the company must be a Special Resolution approved by at least 75% of shareholders who present and vote. The liquidator is appointed by simple majority (s).
- With these resolutions, the company is liquidated and no longer under its director’s authority. The selected Liquidator controls the company, but his powers are limited until the DMP is completed.
- The creditors receive notice of the shareholders’ resolution to liquidate the company and appoint a liquidator. Rarely, creditors can nominate an alternative liquidator. If so, they override the shareholders’ nomination.
- Creditors will receive the company’s history and financial details as part of the DMP (see section 3 above). During the DMP or any virtual creditors’ meeting called as part of the DMP, creditors can ask questions about the company and its finances.
- Creditors can also appoint a liquidation committee of three to five creditors. Large or complex liquidations frequently require such committees. The committee, if established, will receive regular reports from the liquidator(s) on the liquidation’s progress and any planned action. The liquidation committee approves liquidator pay. If no liquidation committee is constituted, the creditors must approve the liquidator’s salary, which is based on time expenses. At the initial “virtual” meeting of creditors, we seek permission for the liquidator(s)’ salary.
What does a liquidator do?
- Run the liquidation
- Fill out all required forms
- Call and arrange the necessary meetings
- Investigate the conduct of directors before the liquidation happened
- Collect assets and turn them into cash
- Work out debts and pay creditors from any assets remaining (known as paying a dividend to creditors. Often the dividend is very little or zero because assets tend to be sold for small amounts of money by liquidators, as there are very few buyers). Note, there is an order of hierarchy in which creditors are paid; secured creditors being settled first.
NOTE – You cannot liquidate your company without a liquidator!
What about directors?
The process itself it director-initiated, meaning it is your choice, as a director to place the company into liquidation (but of course compulsory is slightly different as it is more forced upon you).
Once the company is “in liquidation” the directors have to fill out a detailed questionnaire for the liquidator. They MUST provide all of the company’s books and records to the liquidator (it is a criminal offence to not comply with the liquidators information requests).
The director then must attend the creditors meeting.
Being a director paid through PAYE and a salary, redundancy pay, holiday pay and unpaid wages may be claimed – however there are exceptions to this. Please call us on 08009700539 to talk through your options.
After the company liquidates, you, as a director, are able to become a director of another company. However, you must be sure to not trade with a name similar to the previously liquidated company, as this breaches s216 Insolvency Act 1986.
What happens after company liquidation?
The company is simply removed from the register of companies held at Companies House, and it will cease to exist as a legal entity.
As mentioned above, so long there are no breaches of conduct by the company director(s), they face no penalty, no liability and can move on to set up another company etc. Note: if you, as a director of a recently disolved company, wish to set up a new company within the same industry, seek advice from insolvency practicioners like ourselves. There are some complex rules around, what is known as ‘phoenix’ companies, so it is best to be checked and advised to stay professional and compliant.
ACT NOW… while you still can!
If the business is facing financial difficulties, has no future and very little cash, debtors or small asset values, get it into liquidation BEFORE it runs out of cash and assets to pay for the liquidation. This is a common mistake made by directors, thinking something will turn up…but NO! They fail to act soon enough and so their business ends up with no assets, facing winding up petitions .This is more risky for the directors than voluntary liquidation. See more information on the compulsory liquidation process, of which you want to avoid!!
If you would like to find out more, as well as get answers to legal and insolvency issues, request our FREE 40-page guide for worried directors.
Remember to always act properly. Don’t take chances or think you are smarter than the law – unfortunately, lots of people think they are and end up in personal financial trouble. So, call us now, and ask all the questions you want for free… 0800 9700539.
